Consumers are starting to slow their spending as the holiday season nears
Consumers have started to pull back on their spending after going through most of 2023 powering through inflation and frustrations with higher prices to propel the economy to growth despite widespread predictions of a recession that never materialized.
Americans cut back on their spending in October, according to released by the Commerce Department on Thursday. Consumer spending rose 0.2% last month, a sharp decline from a 0.7% increase in September and the slowest increase since May.
Consumer spending is a significant driver of U.S. economic strength, as it represents over two-thirds of economic activity. While Americans have been willing to spend despite frustrations about the state of inflation and gloomy outlooks on the future, economists are expecting that momentum to slow to finish 2024.
Spending fell the most on items like cars, furniture or appliances, or large factory goods, which are often bought using credit. Economists see that as an indication that higher interest rates are discouraging spending in some areas, which could lead to slower rates of price increases or the introduction of deals to spur demand.
“The personal income and outlays report for October points to more measured spending by U.S. consumers heading into the holiday shopping season amid softening labor market dynamics and cooler inflation trends,” said Lydia Boussour, EY senior economist. “We expect consumers’ spending enthusiasm will dim heading into 2024 given the prospects of weaker labor income growth and still elevated interest rates.”
The slowdown in spending comes as Americans start making plans and purchases for the holiday season, which has stretched out to longer periods as consumers try to combat higher prices by stretching their budgets over longer time periods.
A in stores and online on Black Friday and Cyber Monday, traditionally some of the busiest shopping days of the year for retailers, the National Retail Federation said on Tuesday. Black Friday was the busiest day in terms of spending and the number of shoppers, with Adobe Analytics data showing a record level of spending at $9.8 billion, a 7.5% increase from last year.
While consumers are spending and are expected to continue at record levels in terms of dollars, those figures are also expected to grow at roughly the rate of inflation, which would result in a net push or slight decline when comparing to previous years.
For months, during the holiday season and have offered big discounts on many of the most popular consumer goods like televisions.
A decline in consumer spending is likely to lead in a significant slowdown in the country’s gross domestic product, which measures the total output of goods and services. A revised figure released Wednesday said the economy grew at a blistering 5.2% pace in the third quarter, which runs from July to September.
That figure is expected to slow in the final months of the year despite spending on holiday gifts and other products. Several economic firms are projecting GDP in the fourth quarter to come in below 2% as a result of higher interest rates weighing down borrowing from consumers and businesses.
“Going forward, consumer outlays are likely to cool further in coming quarters as increasing pressure from elevated prices, higher interest rates and the restart of student loan repayments lead to more spending scrutiny,” Boussour said. “With employment growth expected to moderate, the disposable income tailwind from slower inflation will be largely offset by slower wage growth.”
Slower consumer spending and moderating growth will be welcome news for the Federal Reserve, which has increased interest rates 11 times this year to get inflation back to its preferred target of 2%. Inflation has drastically slowed over the last year, with more positive news for fiscal policymakers coming on Thursday when its preferred measure of inflation, the personal consumption expenditures index, showed prices rose 3.5% last month when compared to 2022.
Core prices, which exclude food and energy prices that are notoriously volatile, rose 0.2% in October from September. Consumer prices were also unchanged in October when compared to September and 3% higher than a year earlier. Both were improvements and are bolstering expectations that inflation will cool.
Slowing inflation and a strong jobs market are also lifting up hopes the Fed can pull off a “soft landing,” where inflation returns to normal levels without triggering a recession. A handful of officials from the Fed have indicated recently that they do not think they will need to continue raising rates to get the last bit out inflation worked out of the economy.
Higher rates from the Fed increases the cost to borrow for consumers and businesses in the form of higher interest rates for things like credit cards, auto loans and mortgages.
