Posted by: Josh Lehner | August 4, 2022

Consumers Holding Strong

Just a quick update on household incomes and consumer spending. Last week the June 2022 U.S. income and personal consumption expenditure data were released. As expected, both show strong nominal gains, which were mostly eroded by the current high rate of inflation. On in inflation-adjusted basis, personal income excluding government assistance saw a small decline, while consumer spending eked out a small increase. It’s really been remarkable to see how strong household finances and consumer spending have been so far this year. On the left you can see total, nominal spending continues to grow at rates much stronger than the pre-pandemic trend. On the right you can see how this increase in overall spending is really just due to higher prices, and the real, or inflation-adjusted spending is basically right on the pre-pandemic trend.

This ongoing strength is one reason why it is unlikely the economy has been in recession so far this year. However we are starting to see households tap into the savings they built up earlier in the pandemic. Since the start of the year, our office’s estimate of excess savings is down about 6%. Note that overall savings continues to increase, but it is now increasing at a slower rate than it has been, which is why this measure of excess savings is dropping a little bit. Even so, it is clear that consumers — at least in aggregate — have plenty more firepower to continue to spend if they so choose, or need to to continue to put food on the table and make rent.

Closer to home we lack such timely data. The BEA will release 2022q2 state income data at the end of September, and 2021 state consumer spending data in October. But fear not. We do have one real-time measure of consumer spending that isn’t subject to sampling error or revisions: weekly video lottery sales. In recent months these sales have been on an ever-so-slight downward trajectory, and remain well above pre-pandemic sales so far.

One possibility could be that inflation, and high gas prices in particular are starting to crimp household budgets, especially on discretionary spending like gaming. I believe there is some truth to that. Given how inequitable we know income and wealth is in America, the topline household savings data likely overstates the typical household situation. However that is hard to know at the moment. We know wage growth continues to be strongest among lower-wage jobs and industries. And recent comments made by Visa and MasterCard were a bit contradictory in terms of spending patterns among high- versus low-income cardholders.

That said, another possibility is that this decline in video lottery sales is due to some combination of federal aid running out which had provided a temporary boost, and consumers choosing to spend a bit more of their entertainment dollars on other activities that may have been restricted earlier in the pandemic. This could include formal restrictions or informal choices to avoid airplanes and crowds. In fact, this scenario is exactly what our office has built into the lottery forecast for some time now. This slowdown in sales in recent months is right on track.

Of course disentangling these two big possibilities is challenging in real time. Forecasting is humbling. And you can be accurate for the wrong reasons. Today I am leaning towards some combination of the two, but still mostly the second given increasing strength in travel and entertainment more broadly. We know household’s spending on gas was at a record low before Russia’s invasion of Ukraine, but the big run-up in prices still impacts household budgets in some way, even if the biggest adjustment was spending out of savings or taking on more credit card debt as opposed to cutting back on other items.

Bottom Line: To date consumers are holding up well. The strong household finances built up during the pandemic are allowing spending to continue apace even in the face of very fast inflation. Now, consumers are not increasing the quantity of their purchases much, but rather are paying more for the same items. Even the overall shifts seen in terms of goods vs services, or even gaming are modest in the context of the current macroeconomy and bout of inflation.

Now, at some point consumers may grow weary or burn through their reserves, leading to an outright drop in spending. But for the time being, this has not happened in aggregate. It usually takes job losses, or the fear of losing one’s job for consumers to slow their spending. Given the tight and strong labor market, we are not there yet, even if labor income is slowing. And looking forward, does the recent drop in gas prices free up more room in the budget to spend on other items again, or allow households to rebuilt their savings a bit?

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