Navigating Uncertainties: US Consumer Spending Trends Amid Economic Adjustments

Balancing Expectations and Factors Shaping Consumer Behavior

In the aftermath of a remarkable summer marked by robust consumer spending and financial-market resilience, the US economy appears poised for a slowdown in the upcoming months. This shift is a result of the Federal Reserve’s persistent efforts to address historic inflation, which has prompted both investors and economists to reevaluate their outlook.

US Consumer Spending: A Cornerstone of Economic Momentum

The backbone of the US economy, consumer spending, has driven its growth and vitality. However, with the labor market projected to soften and indicators such as increasing credit-card balances and delinquencies, experts anticipate a mild deceleration in consumer spending. Matthew Palazzolo, a senior investment strategist at Bernstein Private Wealth Management, emphasized that while a significant recession is not expected, an economic softening is likely.

“We’re expecting the labor market to soften somewhat the rest of the year and we’ve seen both credit-card balances and delinquencies increasing, so that should flow through to softer consumer spending,” said Palazzolo.

“But we’re not expecting a significant recession. We’re certainly expecting a softening of the economy.”

Read also: Asian Stock Market Declines Ahead of Fed Chair Powell’s Speech: Impact on Global Economy

Market Projections and Insights

In light of this anticipated economic adjustment, the stock market’s trajectory is expected to shift from its current soaring momentum. Palazzolo suggests that markets could adopt a sideways movement for the remainder of the year as uncertainties persist. The role of Nvidia, a chipmaker, and the intrigue around artificial intelligence’s impact on tech stocks have contributed to the market’s positive performance, though a slump in August, attributed to the traditional vacation period, was observed.

Factors Influencing Spending Patterns

The impending resumption of student loan payments in October introduces a potential headwind to consumer spending. The impact of this development remains uncertain, especially with the introduction of the Biden administration’s income-driven repayment plan. While the average monthly payment for student loans ranges from $210 to $314, the extent to which this will affect spending behaviors remains to be seen.

Another complexity arises from the Federal Reserve’s aggressive inflation-busting campaign. With rate hikes introduced since March 2022, the potential effects on the broader economy are still unfolding. Recent research suggests that it could take up to a year for the consequences of these hikes to manifest.

Balancing Consumer Debt and Savings Dynamics

An additional consideration is the trend of American consumers accumulating credit card debt as savings accounts dwindle. The depletion of excess savings accumulated during pandemic-related stimulus payments and lockdowns is expected by the end of the current quarter. Sinead Colton Grant, head of BNY Mellon investor solutions, emphasizes that the upcoming months, encompassing students returning to school and the holiday season, will be crucial for gauging consumer spending patterns.

“We’re watching the consumer, since it is a very big driver of the US economy, but we believe those effects are likely to be at the margin,” she said. “If the holiday spending period is less robust, that would be a potential warning sign about the strength of the consumer.”

Looking Beyond National Borders: Germany’s Economic Landscape

Shifting focus to Europe, Germany, once a beacon of economic success following labor market reforms, is facing stagnation. A combination of persistent inflation and consecutive quarters of declining or stagnant output has led to a contraction of the country’s economy. The International Monetary Fund forecasts a decline of 0.3% for Germany, in contrast to the average expansion of 0.9% for euro currency-using countries.

Embracing Agility Amidst Uncertainty

As the US economy braces for a potential economic softening and Germany grapples with its economic challenges, a common thread emerges: the need for adaptability. The intricate interplay of factors such as consumer spending patterns, inflation, and global economic dynamics underscores the importance of strategic planning and flexible decision-making. As professionals in a dynamic landscape, being attuned to trends, exploring innovative strategies, and considering short-term adjustments in the context of long-term goals are key to navigating these uncertain times.

Spending could be more timid in 2023 holiday seasons

Spending — With August approaching the midway point, September is on the horizon, heralding the first hints of holiday shopping. Although it is usually advisable to begin shopping early, the state of the economy has created a dilemma that may impair customers’ spending patterns.

According to early predictions for this year’s Christmas shopping, buyers may be forced to be more frugal with their spending, with little to no choice but to spend less. Despite the fact that it is still August, many people are anticipating how the approaching holiday shopping season will unfold.

Read also: 3 ways the Fed’s latest hike rate can affect you

The last two months of the year

November and December are often dominated by customers going from store to store looking for deals and discounts on present purchases. They are an excellent indicator of the consumer’s purchasing power.

The last two months of the year are especially crucial for retailers since they account for one-fifth of their annual sales.

With retailers preparing for the key fourth quarter, which normally results in overall profitability, an estimate has surfaced indicating that merchants will not have blockbuster Christmas sales this year. Regardless, sales are likely to increase over previous year.

“We are cautiously optimistic about the holiday season,” said Coresight Research senior retail/technology analyst John Harmon.

According to Coresight, year-end holiday sales for October through December 2023 will increase by the low single digits compared to 2022.

According to the National Retail Federation, holiday sales in 2022 increased by 5.3% when compared to the previous year for November and December combined. However, the figures do not indicate that the year is on track to hit a new low. It should instead be understood as the United States emerging from years of anomalous economic activity.

According to Harmon, estimates for 2023 are based on good years of significant holiday sales growth, difficulties in drawing comparisons, and projecting how soon holiday spending may commence.

“The patterns of holiday spending have changed,” said Harmon. “It doesn’t all happen all in the fourth quarter these days.”

Early kickoff

Harmon’s remarks harkened back to 2021, when merchants including Amazon and Walmart were worried of customer demand due to the epidemic, kicking off Christmas shopping earlier in October. In 2022, a similar trend was replicated, extending the Christmas shopping season.

For example, Home Depot stated last week that it will begin selling holiday-themed merchandise online. The firm said that it utilized the same strategy as in previous years to increase sales of festive products after observing early customer interest, namely for Christmas merchandise.

Slower sales

However, Harmon emphasized that retail sales in the United States are slowing. 

“There are pluses and minuses for the consumer,” he said.

To underscore his thesis, hourly salaries in the United States are growing year over year, yet the labor force participation rate remains low. As a result, any gains gained by a household are still offset by a number of variables. According to Coresight, one of the causes is persistent (but lowering) inflation on items such as:

  • Groceries
  • Gas
  • Housing
  • Interest-rate hikes
  • Slowing housing market
  • Resumption of student loan repayments

“The savings rate has gone down and it’s a concern that consumer debt levels have gone up,” said Harmon.

Furthermore, Americans’ credit card debt has reached record highs. Credit card debt has reached $1 trillion for the first time, according to figures from the Federal Reserve Bank of New York.

Shopper and spending resilience

Despite various overhangs, customers, according to John Harmon, continue to show resilience as they purchase for essentials, discretionary items, and services.

“So far, consumers really seem to have the desire, will, and ability to keep spending,” he said.

“Barring any cataclysmic event, things seem to be moving in that direction and we don’t foresee a huge risk to holiday spending.”

Back-to-school sales patterns in 2023 support this viewpoint. According to a recent S&P Global Market Intelligence research, school-related product sales are predicted to grow by 1.5% in 2023, as the inflation rate on back-to-school retail sales falls from 5.9% in 2022 to 0.3% in 2023. The study also mentioned how rising wages have aided in the continuation of spending.

Marshal Cohen of Circana predicts that buyers will continue to spend less on presents.

“The good news is there will be pent up demand on the gifting side of the equation,” he said. 

“Spending on essentials, and a lot less on discretionary products, means we have a lot of catching up to do by holiday time and a long list of desires to share with those giving gifts.”

Cohen also predicted that the 2023 holiday shopping season will mirror that of 2022, with a sluggish start in late October, Cyber Monday improving on Black Friday, and a significant delay until the last two weeks before the holidays.

“Consumers are in no rush to spend, and a lack of inspiration with so few new and exciting items makes for a ho-hum holiday at retail,” Cohen noted.