So far, so much better than expected — but what comes next?
While economists were promising consumer capitulation and recession this year, shoppers had other plans and have proven to be more flexible than predicted.
The strength so far seems to be coming from pandemic savings, the consumers’ mindset and a generally better-than-feared economy with the job market holding up while higher interest rates cool inflation.
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If economists and experts are surprised but pleased, they’re also still watchful — looking to see how long consumers will bear up against prices that are still high and a slowdown that remains on the horizon.
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The second half could be a test of just how long the consumer can hold on.
Katie Thomas, who leads the Kearney Consumer Institute think tank and regularly surveys shoppers, said: “Roughly 38 percent of U.S. consumers said they feel somewhat insecure financially. It’s almost a little lower than I would have thought. Forty-four percent of people say that, in the last six months, their feelings of financial stability have gotten worse.”
But the spending continues — and Thomas chalked some of that up to psychology.
“We were talking about pent-up demand in May of 2021 and I was like, ‘This is too soon to be talking about pent-up demand,’” she said. “I think we’re just starting to see it. People want to get out there and live. Consumers are increasingly savvy now and they flex across the wallet.
“To me, the big question I’m thinking about is, have consumers been forced to de-prioritize savings and long-term goals to absorb prices on day-to-day items,” she said.
That’s a question that’s particularly important in the middle-income segment of the market since lower-income shoppers are simply constrained in their spending and affluent shoppers have the ability to keep spending.
Thomas said middle-income consumers “are the most savvy, they are able to make these thoughtful trade-offs across categories.”
So they’re juggling spending between fashion, entertainment, eating out, household goods and more.
It’s a kind of multitasking that many people have been able to pull off with unexpected success.
“The consumer time and time again has defied expectations,” said Erik Lundh, principal economist at The Conference Board.
Many economists expected to see “the consumer really start to go underwater in the first half,” Lundh said.
And shoppers have refused to sink, but there are limits.
Student loan repayments are due to start back up this fall and wages have begun to slip.
The X factor might well be just what’s left in the piggy bank.
“How much do consumers still have in terms of pandemic excess savings?” Lundh said. “They’ve been able to lean on those savings in a high inflation environment to finance spending that they wouldn’t have been able to afford otherwise. There’s still some gas in that tank; it’s down quite a bit from where it was a year ago or so. We’re expecting that probably runs out toward the end of 2023 or the beginning of 2024.
“We’re still calling a recession, but we don’t think it’s going to start until the fourth quarter and it’s going to be short and very shallow, maybe two quarters and growth of negative 1 percent or so,” Lundh said. “The probability of a soft landing is increasing.”
That would mean slowing the economy enough to keep inflation in check, but managing to not go into an actual decline.
Whether or not that soft landing is possible just might depend on the consumer.
To get a read, WWD offers up the vital stats on shoppers headed into the second half.
5.25% to 5.5%
The Federal Funds Rate
The Federal Reserve’s benchmark interest rate impacts everything from monthly credit card charges to the price of a new mortgage and has risen from near zero at the start of 2022, an extremely rapid ascent. While the Fed moved quickly to ward off post-pandemic inflation, the fear is higher borrowing costs will spur a mild recession, perhaps this year.
3.5%
The Unemployment Rate
While higher interest rates are intended to cool employment and therefore reduce spending, there are still plenty of jobs. At the current level, the U.S. is considered to have full employment, all the thousands of layoffs in tech notwithstanding. Many companies are keen to keep their employees and are paying up, with average weekly wages in July at $1,157.28, up from $1,118.62 a year earlier.
117
The Consumer Confidence Index
The Conference Board’s July reading of consumer sentiment hit its highest level in two years, rising to 117 from 110.1 in June. Dana Peterson, chief economist at the group, said: “Headline confidence appears to have broken out of the sideways trend that prevailed for much of the last year. Greater confidence was evident across all age groups, and among both consumers earning incomes less than $50,000 and those making more than $100,000.”
34.5%
Portion of Spending on Goods
Craig Johnson, president of Customer Growth Partners, called consumers’ move away from goods and back toward services post-pandemic a “megatrend” and noted shoppers devoted only 31 percent of their spending to goods in 2019. “We have a lot of normalization to go,” he said.
$500 billion
Excess Savings
The Federal Reserve Bank of San Francisco said U.S. households had squirreled away as much as $2.1 trillion in excess savings as of August 2021, but that kitty was drawn down to $500 billion by May. The cushion, which has helped consumers keep spending, could run out around the end of the year.