The US consumer, who has been the main driver of the economic recovery from the pandemic, is facing a looming spending crunch, according to a strategist. The combination of high inflation, supply chain disruptions, and fading stimulus checks could lead to a sharp slowdown in consumer spending in the coming months.
Inflation erodes purchasing power
One of the biggest challenges for the US consumer is the rising inflation, which has reached its highest level since 1990. The consumer price index (CPI) rose 5.4% year-over-year in September, and the core CPI, which excludes food and energy, rose 4% over the same period. These increases have outpaced the growth in wages and incomes, eroding the purchasing power of consumers.
According to a recent survey by Bankrate, 89% of Americans say they are feeling the impact of inflation on their daily lives. The survey also found that 47% of Americans have cut back on their spending as a result of inflation, and 29% have dipped into their savings or emergency funds.
The most affected categories of spending are food, gas, and utilities, which account for a large share of consumers’ budgets. According to the Bureau of Economic Analysis (BEA), spending on food and beverages increased by only 0.1% in August, while spending on gasoline and other energy goods decreased by 1.3%. Spending on utilities also declined by 0.9% in August.
Supply chain woes limit choices and availability
Another factor that is hurting the US consumer is the ongoing supply chain disruptions, which have caused shortages and delays in many goods and services. The global pandemic has disrupted the production and distribution of goods across various sectors, such as semiconductors, automobiles, furniture, appliances, clothing, and toys.
These supply chain woes have limited the choices and availability of consumers, forcing them to either postpone their purchases or pay higher prices. According to the National Retail Federation (NRF), 69% of retailers say they are facing inventory issues due to supply chain disruptions, and 39% say they are passing along higher costs to consumers.
The NRF also warns that the supply chain problems could affect the holiday shopping season, which is typically the busiest and most profitable time of the year for retailers. The NRF estimates that holiday sales could grow by 8.5% to 10.5% this year compared to last year, but this projection depends on whether consumers can find what they want and when they want it.
Stimulus checks fade away
A third factor that is weighing on the US consumer is the fading effect of the stimulus checks that were distributed by the federal government earlier this year. The stimulus checks were part of the $1.9 trillion American Rescue Plan Act that was signed into law by President Joe Biden in March. The act provided $1,400 payments to most Americans, as well as enhanced unemployment benefits and child tax credits.
The stimulus checks boosted consumer spending in the first half of the year, as consumers used them to pay off debts, save for emergencies, or splurge on discretionary items. According to the BEA, personal income increased by 11.3% in March and 2% in April, while personal consumption expenditures increased by 4.7% in March and 0.9% in April.
However, as the stimulus checks ran out, consumer spending slowed down in the second half of the year. According to the BEA, personal income decreased by 2.7% in May and 0.1% in June, while personal consumption expenditures increased by only 0.1% in May and 1% in June. In August, both personal income and personal consumption expenditures decreased by 0.1%.
A spending crunch ahead?
The combination of these factors could lead to a spending crunch for the US consumer in the near future, according to David Rosenberg, chief economist and strategist at Rosenberg Research. Rosenberg argues that the US consumer is “walking towards a cliff” as inflation eats away their incomes, supply chain issues limit their options, and stimulus checks fade away.
Rosenberg predicts that consumer spending growth could drop from around 12% in the first half of this year to around 2% in the second half of this year. He also warns that consumer confidence could deteriorate further as consumers face higher costs and lower availability of goods and services.
Rosenberg advises consumers to be cautious and prudent with their spending decisions, especially as the holiday season approaches. He also suggests that consumers should focus on saving more and investing wisely to protect their wealth from inflation.
