Amid signs of slowing economic growth, American consumers continue to spend, though at a more moderated pace. Recent data highlights a shift in consumer expenditure from goods to services such as healthcare and dining. The economy still relies heavily on consumer activity as the year progresses, indicating a complex interplay between income growth and spending demands.
Historically, the reliance on consumer spending to prop up the U.S. economy is not unprecedented. Slowdowns in wage increases have previously not always led to major declines in expenditure. The current moderation in growth draws parallels with economic patterns observed in past downturns, where consumers adapted to fluctuating financial landscapes without withdrawing entirely from the market.
How are incomes evolving?
The Bureau of Economic Analysis recently reported a 0.3% rise in personal income for December, mirroring the gain in disposable income when adjusted for taxes. Notably, wages and salaries only increased by 0.2%, the slowest rise in several months. Data also revealed a 0.4% increase in personal consumption expenditures, with durable goods spending slightly declining while service expenditures saw an uptick.
What does this mean for different economic groups?
Households have started to shift their spending patterns, favoring services over discretionary goods. Findings from January’s Wage to Wallet Index denote an uneven financial landscape influencing consumer decisions. For workers earning $25 per hour or less, only a fraction expect their situation to improve, highlighting deep-seated financial anxiety among these consumers.
The overall economic growth has also been affected, with the fourth-quarter GDP expanding at an annualized rate of 1.4%. Despite slower overall growth, consumer spending rose at a reduced pace. While this growth is modest compared to previous quarters, it reflects consumers’ ongoing contributions amid broader economic cooling.
Sentiment among consumers showed slight improvement in February, as reflected by the University of Michigan’s sentiment index. Though current conditions saw an uptick, expectations slightly declined. Concerns remain, with a vast portion of consumers citing high prices straining personal finances.
Consumers are focusing more on service-related expenditures amidst these shifts.
In terms of financial behavior, credit utilization and Buy Now, Pay Later (BNPL) options remain prevalent among younger demographics. Data indicates that BNPL continues to play a crucial role, particularly among millennials, essentially embedding into their financial management strategies.
BNPL usage has shown significant growth among millennials, with increasing reliance on installment plans.
Overall, the data shows a resilient consumer base, albeit contending with slower income and economic growth. Consumers appear to be managing their cash-flow through various financial tools including credit and installment-based purchasing, highlighting adaptability in spending habits. The shift towards services expenditure suggests an ongoing reassessment of needs and priorities amid the evolving economic environment.
