Oct. 30, 2023
Christopher Rugaber and Anne D’Innocenzio
A flow of recent data from the U.S. government has made one thing strikingly clear: A surge in consumer spending is fueling strong growth, demonstrating a resilience that has confounded economists, Federal Reserve officials and even the sour sentiments that Americans themselves have expressed in opinion polls.
Spending by consumers rose by a brisk 0.4% in September the government said Friday — even after adjusting for inflation and even as Americans face ever-higher borrowing costs.
Economists caution that such vigorous spending isn’t likely to continue in the coming months. Many households have been pulling money from a shrinking pool of savings. Others have been turning increasingly to credit cards. And the additional savings that tens of millions of households amassed during the pandemic — from stimulus aid and reduced opportunities to travel, dine out and visit entertainment venues — are nearly depleted, economists say.
Still, the truth is no one knows where things go from here, given the unusual nature of the post-pandemic economy. The “death of the consumer” and an ensuing recession have been forecast by most economists for at least a year. So far, not only is no recession in sight but consumers as a whole appear to be in robust health. Spending might cool in the coming months, yet it’s far from clear it will collapse.
On Thursday, the government said the economy accelerated at a 4.9% annual rate in the July-September quarter, the fastest such rate since 2021, on the back of a jump in Americans’ spending. People spent on used cars and restaurant meals, airfares and hotel rooms. Much of it, even after adjusting for higher prices, was for discretionary items that suggested that many people feel confident in their finances and job security.
The durability of that spending has caught the attention of Fed officials, who have signaled that they will keep their key interest rate unchanged when they meet this week. But they’ve also made clear that they are monitoring the economic data for any sign that inflation could reignite and require further rate hikes.
“I have been consistently surprised at the resilience of consumer spending,” Christopher Waller, an influential member of the Fed’s board, said in a speech this month.
In the meantime, businesses, especially those in the sprawling service sector, are benefiting from what still appears to be pent-up demand, likely driven by higher-income earners, after the restrictions of the pandemic. Last week, Royal Caribbean Group reported robust quarterly earnings. Travelers crowded their cruise ships and spent more even as the company raised prices.
“The acceleration of consumer spending on experiences (has) propelled us towards another outstanding quarter,” said CEO Jason Liberty. “Looking ahead, we see accelerating demand.”
So what’s behind the outsize gains, so far? Economists point to several drivers: Sturdy hiring and low unemployment, along with healthy finances for most households emerging from the pandemic. Wealthier households, in particular, have enjoyed substantial growth in home values and stock portfolios, which are likely juicing their spending.
Steady hiring has sent the unemployment rate down to a near-five-decade low of 3.8% and lifted to a record high the proportion of women in their prime working years — ages 25 through 54 — who are employed. Measures of layoffs are near historical lows. More jobs mean more income, which generally means more spending.
“We continue to believe that you shouldn’t bet against the consumer until actual job losses are on the horizon,” said Tim Duy, chief U.S. economist at SGH Macro Advisers.
In the July-September quarter, Americans ramped up spending on durable goods — furniture, appliances, jewelry and luggage — that people typically cut back on if they’re worried about their jobs or the economy.
With inflation slowing — it’s at a still-high 3.7%, down from a peak of 9.1% in June 2022 — average wages are starting to outpace price gains. By some measures, wage growth hasn’t yet fully offset the inflation surge that began in 2021. But since late last year, pay has risen faster than prices, likely fueling some spending.
In many lower-paying industries, like hotels, restaurants and warehouses, companies have struggled to find and keep workers and have raised pay accordingly. Julia Pollak, chief economist at ZipRecruiter, calculates that for the lowest-paid 10% of workers, wages have jumped 25% since the first quarter of 2020, when the pandemic began. That’s well ahead of the 18% increase in prices over that time.
And most households started 2023 in better shape than they were in before the pandemic erupted, according to a report from the Fed. The net worth of the median household — the midpoint between the richest and poorest — jumped 37% from 2019 through 2022 as home prices shot higher and the stock market rose. That was the biggest surge on records dating back more than 30 years.