Has consumer spending in the United States just peaked?

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The big economic news of the day was that real consumer spending rose in April by the most in three months, helping to push the S&P 500 index to its biggest weekly gain since March. At first glance, this can be seen as a sign of resilience on the part of consumers despite the highest inflation rates since the early 1980s. Maybe, but it’s not encouraging that consumers have to draw more in their pockets to finance these expenses.

Commerce Department data released on Friday showed purchases of goods and services jumped 0.7% in April from March after adjusting for higher prices. Over the past year, only the 1.5% gain in January was larger. Such strength should temper rumors of an impending recession, especially since consumer spending accounts for about two-thirds of the economy. Worryingly, the personal savings rate has fallen further, dropping below 5% for the first time since 2009.

The divergence between spending and saving suggests we may be witnessing the “last hurrah” in the strong consumer narrative. It’s not hard to imagine consumers, watching their savings dwindle just as the stock and bond markets are posting heavy losses, deciding it’s time to take a break from shopping for a while. JPMorgan Chase & Co. estimates that US household wealth has fallen by at least $5 trillion since the start of 2022 and could reach $9 trillion by the end of the year. And it’s not like wages follow inflation or expenses. Commerce Department data also showed personal income rose 0.4% in April, after decelerating 0.5% in March and 0.6% in February. “Call it defying gravity or call it denial, it’s hard to imagine that consumption could continue to grow faster than income forever,” FHN Financial economist Chris Low wrote in a research note to clients. .

US corporate profits fell in the first quarter by the biggest drop in two years, and employers don’t seem as willing to shell out big raises to keep or attract talent in a slowing economy. “We’ve reached a level of wage inflation where employers are going to say, ‘I did everything I can,'” Jonas Prising, chief executive of ManpowerGroup Inc., the Milwaukee-based staffing firm that serves more more than 100,000 customers worldwide, Bloomberg News told Bloomberg News. “‘My consumers and clients are not going to accept me passing on these costs any further, so we need to start mitigating them.'”

It is true that even if the savings rate is down, overall savings are at record levels, which should temper consumer concerns. The generous social programs instituted by the US government to support the economy during the Covid-19 pandemic have allowed consumers to build up incredibly large cash cushions. Check deposits for households and nonprofits rose to $4.06 trillion in December from $1.16 trillion at the end of 2019, according to the Federal Reserve. The previous high for this measure before the pandemic was $1.41 trillion.

Not only that, but the household debt service ratio has been near its lowest level since the start of the pandemic, remaining comfortably below 10% and far from the all-time high of 13.2% in 2007. before the last recession, according to Fed data. This is another reason why betting against the consumer can be foolish. “The drop in the personal savings rate to lows last seen in 2008 shows that consumers are making up for lost time during the pandemic – splurging not only on goods but also on discretionary services – even as inflation takes a bite out of real income,” Bloomberg Economics’ Yelena Shulyatyeva wrote in a research note after the personal income and spending data were released. The problem is that consumers are taking on more debt to maintain their spending habits. The Fed said earlier this month that total credit rose a record $52.4 billion in March from April after a revised gain of $37.7 billion in February, figures show. of the Federal Reserve on Friday. The March surge was more than double the median projection from a Bloomberg survey of economists. Revolving credit outstanding, which includes credit cards, jumped to an unprecedented $31.4 billion.

On Friday, the University of Michigan’s monthly index provided further evidence that consumer spending could soon run out of steam. It showed that sentiment fell in May to the lowest since 2011. In the survey, the part about whether now is a good time to buy a major household item fell to record lows rising to the 1970s. As for whether now is a good time to buy a home, that part of the survey has fallen to its lowest since 1982.

The consumer had a good run, mainly thanks to the quick response of the Fed and the US government to flood the economy with liquidity during the pandemic. But all good things must come to an end, and this could be the start of a major consumer downturn. More other writers at Bloomberg Opinion:

• Is a recession coming? Beware of this indicator: Kathryn Edwards

• Now even chicken is getting too expensive? : David Fickling

• Labor market heading for a soft landing: Conor Sen

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Robert Burgess is the editor of Bloomberg Opinion. Previously, he was Global Editor of Financial Markets for Bloomberg News.

More stories like this are available at bloomberg.com/opinion

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