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Resilience of U.S. Consumer Spending Amid High Inflation and Interest Rates in Early 2024

GOOVER DAILY REPORT August 21, 2024
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TABLE OF CONTENTS

  1. Summary
  2. Factors Contributing to Resilient Consumer Spending in Early 2024
  3. Impact of Depleted Pandemic-Era Savings on Consumer Behavior
  4. Economic Outlook for the Second Half of 2024
  5. Sector-Specific Impact of Economic Trends
  6. Conclusion

1. Summary

  • The report titled 'Resilience of U.S. Consumer Spending Amid High Inflation and Interest Rates in Early 2024' examines how U.S. consumer spending remained robust despite the challenging economic conditions of high inflation and interest rates. Strong job market performance and rising wages were instrumental in sustaining consumer expenditure levels. The report provides a detailed analysis of various factors contributing to this resilience, including the impact of pandemic-era savings, changes in consumer habits, and sector-specific economic trends. It also offers an economic outlook for the second half of 2024, anticipating a slowdown in GDP growth amid persistent financial pressures.

2. Factors Contributing to Resilient Consumer Spending in Early 2024

  • 2-1. Employment Gains and Disposable Income Availability

  • Despite high inflation and interest rates, the U.S. job market showed significant strength in early 2024. The persistence of positive real wage growth and significant recent gains in wealth played a crucial role in sustaining consumer spending. Employment gains contributed to higher disposable income, which enabled consumers to maintain their spending levels. Additionally, the steady job market continued to foster economic confidence among consumers, driving their financial decisions.

  • 2-2. Increase in Spending on Goods and Services

  • Consumer spending on goods and services remained robust in early 2024, supported by rising wages and employment security. This continued spending was one of the key drivers of economic growth, even amid challenges such as dwindling pandemic-era savings and persistent inflation. Data suggests that despite economic pressures, consumers maintained their expenditure, contributing significantly to the overall GDP growth figures.

  • 2-3. Impact of High Inflation and Interest Rates on Consumer Habits

  • High inflation and interest rates impacted consumer habits by increasing the cost of borrowing and reducing the affordability of certain goods and services. However, despite these financial pressures, consumer spending maintained its pace. This resilience is attributed to the strong labor market and rising wages, which helped cushion the adverse effects of high inflation and interest rates. As a result, while there were some shifts in spending behavior, such as possible reductions in savings or strategic expenditure cuts, overall consumer spending did not see a significant decline.

3. Impact of Depleted Pandemic-Era Savings on Consumer Behavior

  • 3-1. Accumulation and Depletion of $2.1 Trillion in Savings

  • During the pandemic, Americans managed to accumulate a substantial amount of savings, totaling a whopping $2.1 trillion. This surplus of funds provided a safety net, allowing consumers to maintain their spending habits even as interest rates climbed and inflation persisted. However, by March 2024, many Americans have more debt than savings, according to economists Hamza Abdelrahman and Luiz Edgard Oliveira from the San Francisco Federal Reserve. This depletion of pandemic-era savings has raised concerns about its detrimental effects on consumer spending, a vital driver of economic growth in the United States.

  • 3-2. Shift in Household Debt and Savings Ratio

  • As of March 2024, the depletion of pandemic-era savings has led to a shift where many Americans are experiencing a negative balance, with more debt than savings. Austan Goolsbee, President of the Chicago Federal Reserve, expressed apprehension about the increasing rate of consumer delinquencies, signaling potential economic downturns. This mounting debt trend has been a significant factor impacting consumer behavior and financial stability.

  • 3-3. Changes in Discretionary Spending Patterns

  • High prices and elevated interest rates have constrained consumer spending, affecting everything from food purchases to home sales. Real consumer spending on durable goods has retreated amid these financial pressures. Consumers are opting for cheaper goods and services and are spending less on discretionary items. This shift in spending patterns reflects the broader economic challenges posed by the depletion of pandemic-era savings, as highlighted in the recent performance of the US economy.

4. Economic Outlook for the Second Half of 2024

  • 4-1. Expected GDP Growth Rates and Economic Slowdowns

  • Based on the provided data, the U.S. economy is predicted to continue expanding in 2024 but at a moderate pace. Argus research anticipates a GDP growth rate of 1.7% for the entire year, down from 2.5% in 2023. The forecast for the middle quarters of 2024 is sub-2% economic growth, while the fourth quarter is expected to see a slight uptick to 2%-plus growth. The Commerce Department reported a second-quarter GDP growth of 2.8%, attributed to increased consumer and business spending which offset declines in housing construction and a widening trade gap. However, high interest rates have begun to show their impact, and there are concerns about potential slowdowns as borrowing costs weigh on households and companies.

  • 4-2. Influence of Interest Rate Policies by the Federal Reserve

  • The Federal Reserve's interest rate policies have significantly affected the economic outlook. As of mid-2024, the federal funds rate remained at 5.25%-5.50%, with the core PCE Inflation Index up by 2.6% annually. The gap between the federal funds rate and the PCE index is around the target range of 250 basis points. With these rates, the Fed has positioned itself ahead of the inflation curve, providing a buffer to potentially begin reducing rates in the future. Nonetheless, high interest rates have continued to constrain consumer and business spending.

  • 4-3. Anticipated Consumer Spending Trends and Inflation Rates

  • Consumer spending remains a crucial driver of the U.S. economy, accounting for nearly 70% of economic activity. In the second quarter of 2024, consumer spending grew by 2.3% year-over-year, due to higher spending on goods (up 2.5%) and services (up 2.2%). Despite this resilience, high inflation and interest rates have started to limit spending in various areas, including food purchases and home sales. Disposable personal income rose by 3.6% year-over-year in the second quarter, albeit lower than the 4.8% increase in the first quarter. Retail sales, adjusted for seasonal variations, grew by 2.5% year-over-year for the quarter, reflecting consumers' ability and willingness to spend despite cost pressures. Continued job and wage gains have been critical in supporting consumer spending.

5. Sector-Specific Impact of Economic Trends

  • 5-1. Performance of the housing market

  • In early 2024, the U.S. housing market experienced a significant downturn due to higher mortgage rates, leading to a slowdown in home sales and new construction. According to the 'U.S. Economic Outlook: July 2024' report, existing home sales saw a decline for the third consecutive month in May, while new home sales fell to their weakest pace since November 2023. This drop in home sales has led to fewer broker commissions and sluggish home improvement activity. Additionally, single-family housing permits fell to their lowest level in 10 months, indicating a pullback by builders as new home inventories increased. A decline in new multifamily starts was also observed, attributed to elevated financing costs and high multifamily supply.

  • 5-2. Consumer spending on travel and entertainment

  • Consumer spending on travel and entertainment remained robust in early 2024 despite economic pressures such as high inflation and rising interest rates. The 'Consumer Spending On Media Continues To Expand, Americans Dominate' report from PQ Media highlighted that American consumers continued to spend significantly more on media compared to their global counterparts, contributing to the expansion in consumer spending in this sector. Specifically, U.S. consumers accounted for nearly a quarter of the $2.3 trillion spent on media worldwide, demonstrating strong domestic consumer activity in this segment.

  • 5-3. Industrial and commercial economic measures

  • Industrial and commercial economic measures showed mixed results in the first half of 2024. Nonresidential construction spending came in weaker than expected in the second quarter, according to the 'U.S. Economic Outlook: July 2024' report. Elevated interest rates and tighter credit conditions were significant factors suppressing investment in private nonresidential structures. Despite this, the overall economy grew by 2.8% in the second quarter, driven by increased consumer and business spending, as reported in the 'US GDP report: Latest data shows economy grew 2.8% in Q2'. However, high borrowing costs have begun to take a larger toll on both households and companies, indicating potential future challenges for industrial and commercial sectors.

6. Conclusion

  • U.S. consumer spending exhibited unexpected strength in early 2024, primarily driven by employment gains and rising wages. Despite the depletion of pandemic-era savings, which previously supported spending, consumer expenditure did not experience a significant decline. However, the shift in household debt and savings ratios raises concerns about the sustainability of this spending trend. The Federal Reserve's high-interest rate policies aimed at curbing inflation have further impacted economic activity, particularly in housing and nonresidential construction sectors. As the year progresses, GDP growth is expected to decelerate, reflecting the broader economic constraints. The findings highlight the importance of continued job and wage growth in supporting consumer spending. Future prospects indicate potential challenges, with high borrowing costs and persistent inflation signaling a more cautious economic outlook. Policymakers and businesses must closely monitor these dynamics to navigate the evolving economic landscape effectively.

7. Glossary

  • 7-1. Pandemic-era Savings [Economic event]

  • The accumulation of $2.1 trillion in savings by U.S. consumers during the COVID-19 pandemic created a financial cushion that supported spending habits into early 2024. As these savings depleted, households faced increased debt burdens, affecting consumer behavior and economic growth.

  • 7-2. Federal Reserve [Economic body]

  • The Federal Reserve's decision to maintain higher interest rates has significantly influenced U.S. economic conditions in 2024. Their policies aim to manage inflation but also shape consumer confidence and spending patterns in the face of economic pressures.

  • 7-3. Consumer Spending [Economic activity]

  • Encompassing roughly 70% of U.S. economic activity, consumer spending remained resilient in early 2024, supported by job and wage gains. However, challenges like high inflation and depleted savings are starting to affect consumer behavior, especially in discretionary spending.

  • 7-4. GDP Growth [Economic indicator]

  • The U.S. GDP growth rate has fluctuated throughout early 2024. Initially robust, it is expected to moderate in the latter half of the year due to high costs and interest rates, impacting economic performance and consumer spending behaviors.

8. Source Documents