(Bloomberg) — The key drivers behind the remarkably resilient U.S. consumer are losing steam at the same time, suggesting that a recent slump in household demand could be more than a one-time event.
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Real disposable income has increased only modestly in the past year. The savings rate is now at a 16-month low as households have largely used up the extra pile of money they socked away during the pandemic. In turn, many Americans are increasingly relying on credit cards and other sources of financing to support their spending.
These factors help explain why real spending — which ignores the impact of inflation — fell in April, with consumers spending less on cars, restaurants and recreational activities. Now that the labor market is also cooling, companies like Best Buy Co. noticed a change in recent months as consumers switch to cheaper brands.
“Slowing momentum in the labor market will continue to limit income growth and push more households to rein in spending amid reduced savings buffers and higher debt burdens,” EY chief economist Gregory Daco said in a note on Friday. “Taking into account the increased price sensitivity, the momentum of household spending will gradually cool down.”
The drop in consumer spending in April, reported Friday, and the recent downward revision to the government’s estimate for first-quarter gross domestic product provide fairly compelling evidence that the U.S. economy is coming off the surprisingly strong pace of 2023.
Read more: From US stores to factory floors, the second quarter is off to a slow start
The latest data is also likely to reassure officials at the Federal Reserve, where a debate has emerged in recent weeks over whether their policy rate – which is at the highest level in more than two decades – is holding the economy back so much. curbed as they expected. would.
The debate stemmed from the strength the American consumer has shown in recent years. While this helped the U.S. economy defy repeated calls for a recession, it confused Wall Street economists and Fed officials alike. Robust labor demand, savings during the pandemic and significant wage increases have all contributed.
But with inflation remaining stubborn and the Fed forced to keep borrowing costs high, the US economy is finally starting to slow. Demand for workers has fallen after the pandemic peaks, meaning employers are no longer raising wages as quickly. Wages and salaries rose 0.2% in April, the smallest increase in five months, the personal consumption expenditure report showed.
Recent business results show that consumers are increasingly prioritizing basic products over bulky, durable items. And higher-income consumers are looking for deals, boosting sales at Walmart Inc. and discount retailer Dollar General Inc. has increased.
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Consumers are making “tough choices with their budgets,” Best Buy CEO Corie Barry said during the company’s first-quarter earnings call. The executive pointed to changes in the macroeconomic environment since the electronic retailer’s last quarterly report.
“Three months ago, several indicators showed some upside, including declining inflation, persistently low unemployment, encouraging trends in consumer confidence and the beginnings of a housing market recovery,” Barry said. “Since then, inflation is still high, mortgage rates are high and consumer confidence scores are lower.”
A new government jobs report, due out on Friday, will provide more insight into the direction of the labor market. Fed policymakers will be watching these numbers closely as they continue their quest to curb inflation without destroying the economy.
Read more: Fed likely to seek more evidence despite cooler inflation numbers
From that perspective, the drop in consumer spending in April likely contributed to the welcome decline in inflation. Yet it may also raise the question of how long the economy can survive.
“Fed officials will view today’s report as evidence of some cooling in consumer spending, indicating less inflationary pressures,” Citigroup Inc. economists Andrew Hollenhorst and Veronica Clark wrote Friday after the PCE report. “Our view of the US economy is not that optimistic.”
–With help from Jaewon Kang and Leslie Patton.
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