The main drivers of consumer spending in the United States are starting to lose steam all at once

(Bloomberg) — The key drivers behind the U.S. consumer's remarkable resilience are simultaneously losing steam, suggesting that the recent decline in household demand may be more than just a one-time dip.

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Real disposable income has risen only modestly over the past year. The savings rate is now at its lowest level in 16 months, with households mostly exhausting the extra pile of cash they acquired during the pandemic. In turn, many Americans increasingly rely on credit cards and other sources of financing to support their spending.

These factors help explain why real spending — which strips out the impact of inflation — fell in April, with consumers spending less on cars, restaurants and entertainment activities. With the job market also slowing, companies like Best Buy Co. have noticed a change in recent months as shoppers turn to cheaper brands.

“Slowing labor market momentum will continue to limit income growth and push more households to exercise spending restraint amid declining savings buffers and rising debt burdens,” Gregory Daco, chief economist at EY, said in a note on Friday. “Taking into account the increased price sensitivity, the momentum of household spending will gradually calm down.”

The decline in consumer spending in April reported on Friday and the recent downward revision of the government's estimates for first-quarter gross domestic product provide fairly convincing evidence that the U.S. economy is coming off the surprisingly strong pace it set in 2023.

The latest data is also likely to reassure officials at the Federal Reserve, where debate has arisen in recent weeks over whether interest rates — which are at their highest level in more than 20 years — are constraining the economy as much as they expected. He was.

This controversy arose from the strength demonstrated by the American consumer over the past two years. Although this helped the US economy repeatedly defy calls for a recession, it baffled Wall Street economists and Federal Reserve officials alike. Strong labor demand, pandemic-era savings, and significant wage gains have contributed to this.

But with inflation holding steady, forcing the Fed to keep borrowing costs high, the US economy finally began to slow. Demand for workers has fallen from the pandemic peak, meaning employers aren't raising wages as quickly anymore. The personal consumption expenditures report showed wages and salaries rose by 0.2% in April, the smallest increase in five months.

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The company's recent earnings indicated that consumers are increasingly prioritizing basic goods over large discretionary items. High-income consumers are trading in or looking for deals, which has helped boost sales at Walmart Inc. and discount retailer Dollar General Inc.

Jobs report

Consumers are making “difficult choices about their budgets,” Best Buy CEO Corey Barry said on a first-quarter earnings call. The executive pointed to changes in the macroeconomic environment since the e-tailer's last quarterly report.

“Three months ago, there were several indicators showing some improvement, including lower inflation, continued low unemployment, encouraging trends in consumer confidence and the beginnings of a housing market recovery,” Barry said. “Since then, inflation remains high, mortgage rates are high, and consumer confidence scores have been trending downward.”

The government's new jobs report, due on Friday, will provide more insights into the direction of the labor market. Fed policymakers will be paying close attention to these numbers as they continue their quest to tame inflation without breaking the economy.

From this perspective, the decline in consumer spending in April likely contributed to the welcome decline in inflation. However, it may also raise the question of how long the economy can hold on.

“Fed officials will view today's report as showing some slowdown in consumer spending suggesting lower inflationary pressure,” Citigroup economists Andrew Hollenhorst and Veronica Clark wrote after Friday's PCE report. “Our view of the US economy is not optimistic.”

– With assistance from Jaeun Kang and Leslie Patton.

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