Has U.S. consumer spending peaked?

On Friday, U.S. real consumer spending rose at the fastest pace in three months in April and pushed the S&P 500 to its biggest weekly gain since March.

At first glance, the data appears to imply that U.S. consumption remains resilient as inflation soars to levels not seen since the early 1980s. But Bloomberg analyst Robert Burgess believes that consumers are having to fork out more to pay for their spending, which doesn’t bode well.

On a price-adjusted basis, U.S. purchases of goods and services rose 0.7% in April from March, according to the Commerce Department. In the past year, only the 1.5% gain in January this year has been bigger than that.

Burgess said the strength should temper talk of a looming recession, especially with consumer spending accounting for about two-thirds of the economy. But worryingly, the personal savings rate has fallen sharply again, falling below 5% for the first time since 2009.

Burgess stated:

“The divergence between spending and saving suggests we may be witnessing a ‘last spree’ of consumers. It’s not hard to imagine consumers watching their savings dwindle amid massive losses in both the stock and bond markets. , will decide it’s time to stop shopping for a while.”

JPMorgan also estimates that U.S. household wealth has shrunk by at least $5 trillion since the start of 2022, and could hit $9 trillion by the end of the year. Also, wages do not appear to be keeping pace with inflation or spending. Personal income rose 0.4% in April, down from 0.5% in March and 0.6% in February, Commerce Department data showed.

FHN Financial analyst Chris Low wrote in a research note to clients:

It’s hard to imagine consumption growing faster than income.

U.S. corporate profits fell by the most in two years in the first quarter, and employers appeared less willing to pay big raises to retain or attract talent amid a slowing economy.

Jonas Prising, CEO of ManpowerGroup, told the media:

We’ve reached a point where wages are going up and employers are probably saying, ‘I’ve done my best and consumers won’t accept that businesses are going to pass on these costs further, so we need to start reducing costs.

ManpowerGroup is a Milwaukee-based human resources firm serving more than 100,000 clients worldwide.

However, Burgess said that while the savings rate may fall, the overall savings rate is at an all-time high, which should ease concerns for consumers.

The U.S. government’s flood of water to support the economy during the pandemic has consumers building up surprisingly high cash buffers.

According to Federal Reserve data, checking deposits at households and nonprofits rose from $1.16 trillion at the end of 2019 to $4.06 trillion in December 2020, a metric that peaked at $1.41 trillion before the pandemic.

Not only that, but Federal Reserve data also shows that since the outbreak, the debt repayment ratio of American households has been near an all-time low, well below 10%, a far cry from the all-time high of 13.2% before the last recession. Analyst Yelena Shulyatyeva said:

The drop in the personal savings rate to 2008 lows shows that consumers are making up for lost time during the pandemic. Not just on goods, but also on discretionary services, even as inflation eats away at real incomes.

The problem is, consumers are taking on more debt to maintain their spending habits. The central bank said earlier this month that total credit rose by a record $52.4 billion in March from April, after a revised $37.7 billion increase in February, Fed data released on Friday showed. The March increase was more than double the median Bloomberg analyst forecast. Outstanding revolving credit, including credit cards, jumped to an unprecedented $31.4 billion.

The University of Michigan’s monthly consumer index on Friday provided further evidence that consumer spending could soon lose steam.

Consumer confidence fell to its lowest level since 2011 in May, the report showed. Confidence in the survey about the right time to buy major household items fell to its lowest level since the 1970s. As for whether now is a good time to buy a home, this part of the confidence survey fell to its lowest level since 1982.

Burgess said:

Consumers are doing well, largely thanks to the Fed and the U.S. government’s quick response during the pandemic, flooding the economy with cash. But there’s no such thing as a banquet, and this could be the start of a major cutback for consumers.

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