Looking at Consumer Spending Trends
The specter of economic uncertainty has loomed large over the world for the past couple of years. However, the World Uncertainty Index (WUI) reports that uncertainty has fallen back to its long-term average level after a huge spike in 2020.
William Reynard notes that the question is, are U.S. consumers seeing the same pattern? Consumer spending fell off a cliff in 2020, as job losses and pessimism about long-term economic recovery spiked. Recent reports suggest that with the rollout of the COVID-19 vaccine and the reopening of the U.S. economy, consumers are leading the charge towards short-term growth with increased spending habits.
Meanwhile, personal investments are on the rise as consumers look to make their money work for them rather than putting it in their savings. Is it too soon to feel optimistic about consumer spending trends and the U.S. economy’s long-term recovery? Let’s examine the evidence.
Consumer spending is a major indication of confidence and a driving force behind recovery. Policymakers will take heart from the fact that U.S. consumer spending has surged in early 2021, perhaps fueled by pent-up frustration after a year in which luxuries like visiting restaurants and air travel were severely limited.
This is confirmed by the stand-out performance of these sectors. Restaurants saw a $14bn increase in sales in April compared with December 2020, far ahead of many other retail markets as a percentage increase. Meanwhile, air travel in the U.S. continues to rise sharply, perhaps as individuals seek to take the vacations they missed out on in 2020 and visit more distant family members and friends.
A healthy dose of caution is needed before we jump to conclusions about long-term economic recovery. While the Conference Board forecasts strong gains through 2021, this is contingent on a successful response to the COVID-19 pandemic and the ability of brick-and-mortar stores to operate normally. Likewise, the transport industry will be hit by further restrictions, but the outlook of U.S. consumers appears to be fundamentally optimistic.
Another key factor we should watch out for is the ability of low-income families to spend in the near future. Income equality surged in 2020, but sustained increased consumer spending depends on low-income Americans having access to jobs after around 9.6 million became unemployed. The White House aims to invest heavily in job growth. The success of this program will be key to continued consumer spending and economic recovery.
Personal saving rates were extremely high during 2020, as uncertainty and job losses drove consumers to prepare for hard times ahead. However, recent data has suggested that saving has slowed dramatically as consumers are spending more freely.
It’s worth noting that the personal saving rate was typically far higher in middle and high-income areas, and data about how much Americans saved in 2020 should be taken with a pinch of salt. In 2019, it was reported that 40% of Americans would struggle to pay an extra $400 bill from their savings.
With job losses in 2020 predominantly affecting low-income families, the personal savings increase is likely more representative of higher-income households. This adds weight to the notion that any rapid consumer spending increase is unlikely to come from lower-income families without a substantial improvement in the job market.
The news that saving is slowing down in favor of increased consumer spending and investment is a positive sign for the economy in many ways. However, it’s also important that consumers find a healthy balance between saving and spending. Analysts will continue to observe whether recent events have impacted consumers’ long-term attitudes to spending and saving.
The start of 2021 saw personal investing featured heavily in the news, as the GameStop saga unfolded and small-time investors became a front-page story. Whether this has fundamentally changed our relationship with Wall Street and investing, as some predicted, remains to be seen.
What is more apparent is that Americans are investing far more heavily than they used to. With small-time investors flooding into the market and newer options like cryptocurrencies surging in popularity, it could be the case that consumers are showing a preference for investing rather than saving.
While investing is typically regarded as the preserve of experts and inherently riskier than saving, this development could speak for a broader change in consumer attitudes as individuals attach a higher priority to their quality of life. Whatever the underlying cause, increased investing is generally good news for industry, which may, in turn, drive an increase in jobs.
The short-term outlook for consumer spending trends appears to be that spending and investment are increasing, while personal savings are declining compared to 2020. Tourism and retail seem to be the main beneficiaries, but it remains to be seen if this growth can be sustained.
The economic forecast for the U.S. is mostly positive but remains contingent on job growth and the ability of low-income households to match wider consumer spending trends.