US consumer spending has shown remarkable resilience across different economic phases, from splurging on home exercise bikes during the pandemic to more recent vacation spending in the post-pandemic era.
The Economist newspaper said that despite previous concerns from bank executives about the impact of inflation on consumer behavior, spending continued to drive GDP growth, outpacing the growth of other G7 countries.
However, the paper notes that recent trends may indicate a change. Consumer spending growth slowed to 0.2% in April from 0.7% last March, with overall spending contracting in real terms.
This slowdown, according to the newspaper, is reflected in the retail sectors. A tightening in consumer spending was observed.
American families had exhausted $2.1 trillion in Corona pandemic savings by last March.
Increasing reliance on credit
The newspaper expects that the durability of pandemic-era savings has reached its limits, as households have exhausted an estimated $2.1 trillion in excess savings by last March, according to the Federal Reserve Bank of San Francisco.
This attrition has led to increased reliance on credit cards, as repayment challenges become apparent. According to Paul Siegfried of TransUnion Credit Ratings, nearly 440,000 credit cardholders have had their ratings downgraded to poor status since last April, with delinquency rates repeating post-2008 financial crisis levels.
Optimism among financial analysts
Despite these worrying indicators, some analysts remain optimistic about the overall economic outlook.
Eric Wallerstein, of Yardeni Research, said in an interview with the newspaper that while the Federal Reserve’s benchmark interest rate has risen to more than double what it was in 2019, current delinquency rates are much lower than historical averages from 1991 to 2011. This indicates a manageable level of financial stress.
A divided economic landscape
The economic scene represents a great contrast between those who are financially stressed and those who continue to prosper, according to what the newspaper said.
Wealthy spenders, especially those who live in areas like Miami’s South Beach, face fewer challenges managing credit card debt than Florida, home to many low-income workers and one of the highest default rates.
In addition, as a large portion of mortgage debt was refinanced at lower rates during 2020-2021, many households are enjoying lower debt servicing burdens, also supported by higher asset prices and investment returns.
The path to economic stability
The newspaper points out that the crucial question for the American economy is the percentage of consumers who may struggle to cover their expenses. Although depleting excess savings poses challenges, continued consumer spending depends largely on sustainable income growth.
The newspaper says that the employment sector remains strong, and initial signs of lower inflation are likely to boost real income levels.
Although household balance sheets are showing signs of weakness, there remains cautious optimism that the United States may continue to avoid a severe crisis in consumer spending.
