Exploring the Sustainability of Consumer-Led Economic Growth
The robust nature of consumer spending in the United States is a critical engine of economic activity, accounting for approximately two-thirds of the country's gross domestic product (GDP). The resilience of this spending has been a linchpin holding the economy steady amidst the headwinds of persistent inflation and the Federal Reserve's interest rate hikes over the past 18 months. As we approach the holiday season and peer into the horizon of 2024, the question of whether consumer spending can sustain this economic vitality becomes increasingly pressing.
Understanding the Federal Reserve's Balancing Act
The Federal Reserve's strategy of implementing higher interest rates to temper consumer spending is a delicate maneuver aimed at reining in inflation without stalling economic momentum. This fine-tuning is essential—too sharp a decline in spending could tip the economy into a recession, while a moderate deceleration may indeed be a necessary adjustment for longer-term stability.
Deciphering Consumer Spending Trends
Consumer spending patterns are closely monitored through personal consumption expenditures (PCE), a metric published monthly by the Bureau of Economic Analysis (BEA). Economists parse this data to deduce short-term trends and gauge long-term economic health. The latest reports indicate a robust 0.7% month-over-month growth in September PCE, an encouraging sign in real terms as spending outpaces inflation rates. The year-over-year PCE growth stands at 5.9%, significantly surpassing the Federal Reserve's 2% inflation target as per the PCE price index.
The Pandemic's Long Shadow on Consumer Behavior
The narrative of current consumer spending has its roots in the pandemic-induced recession. During this period, consumers accumulated savings due to government stimulus checks and restricted spending opportunities. The personal saving rate reached an unprecedented high, subsequently declining yet remaining above pre-pandemic levels until late 2021. By September 2023, the saving rate has tapered to 3.4%, a dip below the pre-pandemic average, signaling a willingness among consumers to spend in the face of inflation.
Examining the Propensity to Spend Over Save
The trend of high expenditure against low savings can be attributed to several factors. Lower-income households may find themselves spending more out of necessity due to inflationary pressures on basic needs. Others, with more disposable income, could be fulfilling pent-up demand for goods and services previously inaccessible during the pandemic. The mindset of living in the present, influenced by pandemic uncertainties, and the daunting housing market may also be diverting consumers from traditional saving behaviors.
However, the story is more nuanced at the macroeconomic level. Data revisions suggest the existence of "excess savings" in the range of $1 trillion to $1.8 trillion, with a substantial portion still buttressing middle-class spending potential.
Reinforcing this perspective, the Federal Reserve Survey of Consumer Finances indicates a remarkable 37% increase in median net worth among American families from 2019 to 2022, with younger consumers under 35 years witnessing a net worth surge of 143%. These gains, however, do not factor in the ongoing inflationary effects of 2023.
Wages in the Inflation Equation
Savings will play a role in sustaining consumer spending into 2024, but the long-term viability rests on wage growth keeping pace with inflation. The average hourly earnings rose by 4.2% in the year ending September 2023, slightly above the PCE inflation rate for the same period. This suggests a cautious optimism that wage growth could align with inflation management efforts without exacerbating it further.
The Significance of Holiday Spending
The holiday season, a critical phase for retail, accounts for a significant chunk of annual consumer spending. The National Retail Federation's survey forecasts an average spending increase for the 2023 holiday season. While consumer confidence surveys have shown some recent dips, the actual impact on holiday spending—and its implications for 2024 consumer trends—remains to be seen.
In closing, while this analysis offers a window into the complexities of consumer spending and its implications for economic growth, it is not a directive for financial decision-making. Readers are encouraged to consult independent financial advisors to navigate the interplay of economic indicators and personal financial planning.