- The slowdown in consumer spending could be a warning sign for the U.S. economy.
- Retail spending fell 1.3% over the past three months, according to Census data.
America’s stimulus shopping frenzy appears to be all but over, with economists saying the drop in spending could be a sign a consumer-driven recession is on the way.
Consumers are finally starting to rein in their spending habits, but this could weigh on the economy after a long period of strong spending over the past few years that has underpinned growth. Retail spending rose 0.1% in May, but sales over the past three months were down 1.3% from a year earlier. U.S. Census Data show.
That led to a 4% decline in retail sales in the first quarter, a strong sign that a long-awaited consumer recession is on the way, economist David Rosenberg said recently.
“Consumer weakness can now be considered a ‘trend’… ‘prices’ for real retail sales in the second quarter are now negative, following a 4.4% annualized decline in the first quarter,” he said in a client note this week. “Early signs of a consumer recession are finally beginning to surface.”
Shoppers are simply loosening their purse strings to cope with the cumulative effects of inflation and a sluggish job market.
The main reasons for the deterioration in consumer sentiment are said to be rising living costs and sluggish hiring activity. A recent McKinsey studyAmong those surveyed by the consulting firm, 55% said they had “pessimistic” or “mixed” feelings about the economy in the second quarter.
“Overall, consumer sentiment remains weaker than it was pre-pandemic, likely due to lingering fears about inflation and interest rates,” Deutsche Bank strategists said in a recent note. “While the labor market appears strong on the surface, consumer confidence about the workforce outlook is starting to weaken, suggesting the unemployment rate could rise.”
Consumer credit, especially for low- to middle-income earners, has also worsened since last year. Credit card loan delinquency rate Interest rates rose to their highest level in 13 years, according to Federal Reserve data.
Meanwhile, a McKinsey survey found that 76% of consumers “traded down” in the first quarter, meaning they looked for better prices or switched to cheaper brands.
“Consumers are spending and they’re borrowing,” veteran forecaster Stephanie Pomboy, one of the commentators who predicted the 2008 financial crisis, said in a recent interview on the Thoughtful Money podcast. “Consumers are spending all the money they have and then spending more just to maintain their basic necessities.”
According to the McKinsey survey, 37% of consumers said they plan to spend less on takeout meals and 35% said they plan to spend less at sit-down restaurants. More than 30% of respondents said they plan to spend less on international and domestic flights, and 32% said they would spend less on alcohol.
These spending cuts could hit an already weakening GDP after several remarkably strong quarters in 2023. The economy grew 1.6% in the first quarter of this year and 4.9% and 3.4% in the third and fourth quarters of last year, respectively.
There is a 52% chance that the United States will fall into recession by next May, according to a forecast by the National Institute for Economic Research. Federal Reserve Bank of New York.
“We expect a further slowdown in the third quarter” for aggregate consumption, Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a note this week. “The slowdown is real and it’s still ongoing.”