Retail purchases have been at declining levels for three of the past four months. Adjusted for inflation, spending on services (including rent, haircuts and most bills) was flat in December, the worst monthly reading in nearly a year. Sales of existing U.S. homes fell last year to the lowest level since 2014 as mortgage rates rose. The auto industry had its worst sales year in more than a decade.
It was a marked turnaround from the second half of 2020, when loose U.S. monetary policy lifted the economy out of a pandemic slump and helped the country avoid the prolonged recession many economists feared. Consumers snapped up exercise bikes, TVs and laptops during the embargo. When restrictions were lifted, consumers were eager to travel to their favorite restaurants and tourist destinations.
Aided by government stimulus, ample savings accounts and cheap credit, consumers continued to spend, even as inflation rose. In the face of four decades of high inflation last year, U.S. consumers continued to spend more than that figure. For most of 2022, consumer spending growth outpaces price increases by about 2 percentage points.
Now, the forces that helped keep spending high are fading while inflation remains high. in December, the share of monthly income Americans spent on savings was 3.4 percent, down from 7.5 percent a year earlier and an all-time high in April 2020. Credit card rates have been rising, and Federal Reserve officials say they plan to raise the central bank's benchmark interest rate by another 25 percentage points this week. That would bring rates to between 4.5 percent and 4.75 percent, up from near-zero levels early last year.
Weak spending
Consumer spending surged after the easing of the Covid blockade, but has fallen in recent months due to high inflation, while savings have retreated from their pandemic highs.
Annual inflation, as measured by the Consumer Price Index, remained above 5% for the 19th consecutive month in December, the longest duration since the early 1980s.
Consumer spending accounts for about 70 percent of the U.S. economy. The average business and academic economist surveyed by The Wall Street Journal pegged the likelihood of a recession in the next 12 months at 61 percent, a key reason. However, many economists say the U.S. could avoid a recession altogether if spending patterns stabilize.
One factor that makes forecasting more difficult is that while unemployment is at its lowest level in half a century, large companies including Amazon, Goldman Sachs Group and Microsoft have already begun laying off workers.
So far, jobs remain plentiful and wages continue to rise in the face of the Fed's tightening policies. the unemployment rate was at a low of 3.5% in December. Hourly wages rose a robust 4.6% year-over-year. According to the Labor Department, there were about 10.5 million job openings in November, indicating that demand for labor remains strong.
Marianne Wanamaker, an economist at the University of Tennessee, said, "Families are very relieved about their job prospects in a way that they wouldn't normally be. Knowing that they could find a job tomorrow if they wanted to, and that remains largely true."
Nevertheless, there are still signs of a weak labor market. Employers are firing temporary workers at a rapid pace, and those who lose their jobs are taking longer to find new ones. Meanwhile, the number of hours worked per week has fallen for two consecutive months, leading to a decline in workers' take-home pay, according to the Labor Department.
Many consumers are also feeling the pinch: The rapid rise in interest rates over the past year, associated with the Fed's tightening policies, has pushed up the cost of all types of debt.
Mortgage rates reached their highest level in 20 years last fall. About 57 percent of consumers are worried about paying for housing in the fourth quarter, up from 48 percent in the third quarter, according to a survey by Freddie Mac.
Credit card balances rose 15 percent year-over-year in the third quarter, the largest increase in more than two decades, according to the Federal Reserve Bank of New York.
In addition, tens of millions of Americans will begin or resume making student loan payments later this year following the Supreme Court's ruling on President Biden's student debt cancellation plan. Payments have been frozen since March 2020 and are scheduled to restart 60 days after the lawsuit is settled or the plan is implemented.
Many taxpayers will receive fewer refunds when they file their tax returns in the coming months because Congress has not extended the tax cuts implemented at the height of the pandemic.
Most Americans who lose their jobs can receive unemployment benefits for six months or less at the same level as before the pandemic program was launched, a fraction of their previous wages. The pandemic program allowed Americans to receive unemployment benefits for up to 18 months and in some cases paid workers more than they were paid.
Previously generous unemployment benefits and direct federal payments to households resulted in Americans saving a record share of their income each month in 2020. Since then, the savings rate has fallen from more than 30 percent of monthly income at the start of the embargo to about 3 percent. In 2019, the year before the pandemic, the rate was 8.8 percent.
In December, arrivals at the ports of Los Angeles and Long Beach, California, fell 20.1 percent year-over-year and have been below 2019 levels since August. The backlog of cargo at the ports came to the attention of President Biden more than a year ago.
Nicholas Hobbs, chief operating officer of J.B. Hunt Transport Services, said the company has seen a decline in demand for large and bulky products, including appliances, furniture and fitness equipment. This is despite increased shipments from lower-priced retailers with discounted inventory.