The economy’s rebound from the pandemic has had a singular driving force: the consumer. With substantial savings and a robust labor market, Americans have spent exuberantly on goods like furniture and electronics, and services such as air travel and dining out. However, the sustainability of this spending surge is now a crucial question.
Despite global market disruptions, many economists urge caution over panic — at least for now. July saw a notable slowdown in hiring and a rise in unemployment to its highest since October 2021, but consumer spending has remained relatively robust. Wages are increasing, albeit more slowly, and job cuts are still minimal. This strength in spending fueled greater-than-expected economic growth in the spring.
However, this could shift if the labor market’s slowdown accelerates. Some consumers, especially those with lower incomes, are already feeling the pinch of higher prices and elevated interest rates. Credit card delinquencies are rising, household debt is swelling, and pandemic-era savings are dwindling. In June, Americans saved just 3.4 percent of their after-tax income, down from 4.8 percent a year earlier.
Corporate executives are acknowledging this shift in consumer behavior. Disney recently cited a “moderation of consumer demand” impacting its theme parks. McDonald’s and Amazon executives also reported seeing more cautious spending patterns. McDonald’s, for instance, has introduced a $5 value meal to attract budget-conscious consumers, while Amazon has observed a shift towards lower-cost items.
Retailers and food manufacturers are responding to this cautious spending. Many are cutting prices, offering more sales, or increasing portions. PepsiCo, after a 0.5 percent revenue decline in its Frito-Lay snack business, plans to cut prices or offer more sales on certain snacks. Even higher-income consumers, less affected by high interest rates, are adjusting their spending habits.
Retail sales, however, have not buckled. In June, they remained unchanged from the previous month, defying expectations of a decline. Yet, shifts in spending are evident. Shoppers are generally opting for lower-cost items, and purchases of higher-ticket items have declined.
Walmart is targeting higher-income shoppers with a revamped private-label food line, hoping to retain them post-inflation. The coming weeks, as major retailers report quarterly earnings, will provide clearer insights into consumer behavior.
Even airlines, which enjoyed a post-pandemic surge, are bracing for a potential decline in demand. The Federal Reserve, expected to begin cutting interest rates soon, may provide some consumer relief. However, the weak July jobs data suggests potential deeper consumer restraint ahead. The number of part-time workers preferring full-time employment has increased, and average hours worked per week have slightly decreased, indicating less take-home pay.
If this trend continues, it could trigger a damaging economic cycle. Firms pulling back on hiring could lead to job losses, further restricting consumer spending and driving companies to cut more jobs, creating a self-fulfilling economic downturn. The resilience of consumer spending, therefore, remains a pivotal factor in the ongoing economic recovery.