How Sustainable Is The Consumer Spending Spree?
February 12, 2024
By Taylor Knaack
Economists are puzzled by the economy's resilience despite turbulence. A recession was penciled in for 2023 yet it never came. With ongoing positive economic reports, 2024 also appears to be a year of resilience. Let’s look at two of the reasons the economy remained strong: consumer spending and a strong job market.
What's Keeping Spending Robust?
With interest rates being at an all-time high, consumers are supposed to be tapped out at this point, yet they continue to spend. The Personal Consumption Expenditures Price Index (PCE) measures changes in consumer spending and is the Federal Reserve's preferred inflation gauge. Core PCE, excluding food and fuel, rose 0.2% in December and 2.9% over the year, indicating potential inflation increases.
Why are consumers able to continue to spend as they are weathering high prices? One reason is credit card debt. Consumers exhausted their savings built up from the pandemic to offset the high prices of goods and services. Now that their savings are gone, they resorted to debt to sustain their lifestyles. Economists Tim Quinlan and Shannon Seery Grein stated in a recent commentary, “When your expenses are growing faster than your paycheck, credit cards are not an indulgence, they’re a lifeline.” U.S. consumers account for nearly three-fourths of the U.S. economic activity. Many economists believe that consumer spending, which is the base of gross domestic product, is being held up by credit card debt and may not be sustainable.
Consumer spending drives economic growth, fostering business expansion, reducing unemployment, and enhancing overall economic conditions. Increased consumer spending amplifies the demand for products and services, highlighting the significance of the relationship between supply and demand. Nonetheless, high interest rates pose a challenge. Policymakers aim to temper consumer spending to meet the 2% inflation target before considering interest rate cuts.
Job Market Remains Strong
In January 2024, U.S. employers added 353,000 jobs, surpassing the economists' consensus forecast of 185,000. Despite the Federal Reserve's efforts to combat inflation, the job market remains robust. Nearly every industry experienced job growth, defying typical challenges posed by high interest rates. Additionally, the workforce is expanding. More individuals are rejoining employment, pushing the prime working-age participation rate to 83.3% in January.
A strong job market correlates favorably with consumer spending. Recent job growth resulted in sustainable income gains for American households. This high correlation suggests that continued real income gains for workers contribute to healthy growth in consumer spending.
Amidst the perplexing resilience of the economy, consumer spending and a robust job market stand as pillars of strength. As policymakers balance growth and inflation, the timeline for easing high-interest rates remains uncertain. If you have any questions, please contact your financial advisor today. Your financial well-being matters to us.