Growth in Consumer Spending and Decline in Income
Consumer spending grew by 0.7% in September compared to the previous month, while personal income only increased by 0.3%. Despite high inflation and elevated interest rates, consumer spending remained strong, but it is not clear if their financial conditions are healthy enough to continue spending.
Decline in Real Income and Increased Spending
If your receipts are rising and your bank account balance is decreasing in September, you are not alone, according to a monthly government report. Consumer spending rose by 0.7% in September compared to August, surpassing income growth of 0.3%, according to the Bureau of Economic Analysis. This spending campaign, which has already been noted in separate reports, led to a decline in the savings rate to 3.4%, the lowest level since December, and half of the 7.7% savings rate in February 2020 before the pandemic spread.
Moreover, after-tax personal income fell by 0.1%, marking the fourth consecutive decline over the past four months, indicating that consumers in general are heading toward financial losses.
The Impact of Consumer Spending on the Economy
New data confirmed a trend that economists have been analyzing for years: that consumers saved vast amounts of money when the pandemic broke out – they were almost forced to do so due to business closures – and have been spending it ever since. (What remains unclear is who has the excess money and how much they have).
Whether people continue to buy cars, movie tickets, and dine out as if there were no tomorrow has serious implications for the economy: consumer spending has supported economic growth even amid rapid inflation and high interest rates that have negatively affected the economy. The ability of consumers to keep spending may determine whether the U.S. economy continues to grow or enters a recession next year.
The Potential Impact of Interest Rate Hikes
There is one reason why some economists expect the latter scenario: the Federal Reserve has raised the benchmark interest rate to its highest level in 22 years over the past two and a half years, leading to rising interest rates on mortgages, auto loans, credit cards, and other consumer credit. The goal is to discourage borrowing and spending, restore balance between supply and demand, and reduce inflation to the Fed’s target of a 2% annual rate.
That has not worked quite as planned. A report released on Friday showed that inflation continues to slow, though at a sluggish pace. Consumer prices, as measured by personal spending, rose by 3.4% over the 12 months up to September – the same rate as in August and July. At the same time, core inflation, which excludes volatile food and energy prices, dipped to 3.7% from 3.8% over the year.
Challenges of Interest Rate Increases
Consumers have ignored high interest rates on consumer loans, undermining the Federal Reserve’s efforts to slow spending. This suggests that the central bank may have to keep interest rates high for a longer period, prolonging the suffering of home buyers and other borrowers facing the highest interest costs in decades.
The Potential Impact of a More Aggressive Central Bank
On the flip side, a more aggressive central bank means that savers resisting the trend of spending at all costs may continue to earn high returns on certificates of deposit and high-yield savings accounts.
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