Consumers Become Cautious
Growth in consumer expenditures outweighed a contraction in private investment that was driven by a slowdown in inventory accumulation, helping the real gross domestic product grow by 1.1% annualized for the first three months of the year, according to the Bureau of Economic Analysis.
While quarterly GDP is the established barometer of the economy, the more detailed monthly data on intra-quarter changes in consumer spending, which accounts for about two-thirds of the measure, paint a gloomier picture. In a separate report, the agency reported that real consumption expenditures were flat in March, after declining by 0.2% in February. In other words, spending has cooled since the blowout month of January.
To add fuel to the fire, inflation-adjusted spending in March grew mainly in categories that bring little joy to consumers, such as gasoline and other energy, housing and utilities, and health care.
The growth in spending on gasoline and other forms of energy show that people are driving more. March data pre-dates this year’s spring break, so there is a case to be made that some of the growth in spending on gasoline is coming from more people commuting to work. Spending on gasoline and other energy growth was similar in February.
Consumers pulled back everywhere else, including on travel, entertainment and dining out, where spending had been robust after having been unavailable during the pandemic. But the steepest decline came from spending on motor vehicles and parts.
After inflation-adjusted spending in this category spiked by 16.1% in January, consumption fell by 1.5% in February and 1.8% in March. Furthermore, households are still buying fewer automobiles than they were prior to the pandemic. March auto sales reached an annual rate of 14.8 million units, compared to the 2016 to 2019 average of 17 million. Since the start of the pandemic, the cumulative deficit in autos purchased relative to pre-pandemic times totals 8.7 million units. The need to replace aging automobiles could keep spending in this category afloat even if a recession materializes, as many expect.
Meanwhile, inflation is weighing on households. The Federal Reserve’s preferred measure of inflation, the personal consumption expenditures (PCE) price index, grew by 0.1% in March and was 4.2% higher than a year ago. Core inflation, which excludes the more volatile food and energy categories, grew by 0.3% during the month and 4.6% over the year.
Incomes are growing modestly, yet outpacing consumption, meaning that consumers are saving more. The savings rate, which measures the amount of disposable income remaining after spending, rose to 5.1% in March, its highest rate since December 2021. An increase in savings suggests that households have become less comfortable with the state of the economy.
Yet households still hold much of the extra savings amassed from relief payments.
Household savings in excess of what they would have been since the start of 2020 is roughly $1.6 trillion. This cash cushion has been depleted by about $985 billion from its peak in September 2021, but could help prevent a catastrophic fall in spending in a down economy. And consumer surveys show that to be the case. The average household expects to spend 5.7% more next March than it did last year, up from the 5.6% level recorded in the previous month according to the Federal Reserve Bank of New York’s Household Survey.
The Michigan Consumer Sentiment Survey, meanwhile, has been ticking higher, registering 63.5 in April compared to a recent-low of 50 in June 2022, suggesting that despite worries of higher prices and a coming recession, consumers are taking current conditions in stride, for now.
What We’re Watching …
The April employment report is set to arrive this week, with expectations of job growth slowing to around 200,000, which is still far above the number of new jobs needed in a month to account for population growth and keep the labor market in equilibrium. In other words, the labor market is still too robust for the Federal Reserve. But there are signs of cooling.
Continuing claims for unemployment are drifting higher, layoff announcements are everywhere and the number of job openings is falling. Add to that declining factory activity, slowing retail sales and a stalled housing market, and it appears that the Fed is well on its way to getting the result it seeks: lower inflation.
