Are consumers in a funk? Consumer spending contracted nearly 1% in December 2021, and the University of Michigan’s consumer sentiment index dropped to a gloomy 62.8 in February.
PayPal seemed to think so during its early February earnings call. “The impact of omicron and the effect of inflationary prices combined with lack of [government] stimulus” was having an impact on spending, said CFO John Rainey, particularly among low-income users of the company’s payments network.
Just Friday, however, the Bureau of Economic Analysis reported that personal consumption expenditures, a measure of consumer spending, rose 2.1% in January (1.5% when adjusted for inflation). That was the most significant jump since March 2021. Buttressing the PCE numbers, Bank of America said spending on its credit and debit cards rose 17% in January compared with a year earlier.
So, is the dispirited consumer likely to continue to spend at January’s rate?
On the plus side, U.S. households still have $2 trillion saved up from earlier in the pandemic, wrote PNC Financial economist Gus Faucher last week. Jobs are still plentiful. And as the pandemic fades, more consumers are likely to go to restaurants and splurge on entertainment. (After all, consumer credit card balances are still tens of billions below their level in 2019.)
But the macroeconomic headwinds are strong. Oil and natural gas are expensive and still rising in price, Russia’s invasion of Ukraine could upend financial markets and shrink households’ nest eggs, and U.S. home prices are surging, just to name three.
Also weighing on consumers’ minds is inflation. Depending on the data source, U.S. consumers expect overall inflation of 4% to 6% for 2022.
“With PCE [index] inflation running at its fastest pace in four decades, rapidly rising prices are eating away at real incomes and savings,” Faucher wrote. In addition, “the Federal Reserve will aggressively raise interest rates this year … making it more expensive for households to borrow.”
Regardless, some economists still believe consumers will pull their weight. Bill Adams, chief economist for Comerica Bank, called the 26.6 drop in the Michigan sentiment index since August 2021 “concerning” but said household balance sheets were better positioned to absorb inflation than “in the dark days of 2011,” when inflation climbed to 3% and consumer spending fizzled.
The drop in consumer sentiment in the first two months of 2022 “is unlikely to signal an outright contraction of economic activity,” Adams said.
The BEA will report February’s data on personal consumption expenditures on March 31.