- As the economy normalizes, Americans are shifting their spending from goods to services.
- This change is sustaining the recovery as consumer spending accounts for two-thirds of GDP.
- But the transition is dangerous because any shock could cut overall spending and threaten a recession.
After more than a year of stronger-than-usual spending, Americans are changing that. That’s not necessarily a bad thing.
The wave of spending that boosted the economy from the coronavirus recession is fading. Spending at retail and restaurants was flat through July, slowing from a 0.8% increase the previous month, according to the Census Bureau. That was just below the median forecast of 0.1% by economists surveyed by Bloomberg, and was the smallest one-month gain since sales fell in December.
Private consumption accounts for about two-thirds of total economic activity and is a key factor in the country’s recovery. Wednesday’s print showed that Americans are starting to retreat, and comments from the nation’s largest retail chain suggest the slowdown is getting worse. The target stock plunged Wednesday after reporting an 89% decline.
Walmart performed well when it reported quarterly earnings on Tuesday, but similar discounts and inventory liquidation are expected to bring full-year earnings down 9% to 11%. said it was canceling “billion-dollar orders” to better match supply with declining shopper demand.
Walmart’s second-quarter earnings showed significant growth from an unusual cohort: high-income Americans. Walmart CEO Doug McMillon told CNBC on Tuesday that households with incomes above $100,000 visited chains more frequently throughout the second quarter to avoid inflation.
“People are really focused on price now, regardless of income level,” he added.
On the surface, this setback looks like a worrying trend for an economy that is still on the mend. But other indicators show that Americans aren’t cutting back outright, but instead shifting spending to sectors that were little loved just a few months ago.
From a treasure trove of goods to the revival of the service industry
With the initial lockdown in 2020 and the reopening of the economy the following year, Americans have spent heavily on goods. That surge is finally balancing out as Americans shift spending toward services. Leisure and hospitality activities have boomed over the past few months as Americans have taken advantage of the summer travel season.
Inflation is also most intense in sectors that produce goods. As households fend off price hikes and return to pre-crisis spending habits, services will be able to spend more time in the sun.
“Consumer spending is much broader than retail sales alone,” said James Knightley, ING’s chief international economist.[The spending shift] Retail sales are set to undershoot broader spending trends over the next few quarters and still have a long way to go. ”
Pivoting is not without significant risks. Inflation fell to 8.5% in his year through July, but is still close to its 40-year high. The road to sustainable inflation levels could be bumpy, with supply chain issues and Russia’s invasion of Ukraine still confusing economic forecasts. If inflation accelerates further in the service sector, Americans can cut overall spending and take the fuel out of the economic engine.
The shift in spending from goods to services is also in its early stages, and trends have a long way to go to return to pre-crisis levels. If any shock, whether it be rising unemployment or a recurrence of last year’s supply shortages, hampers the recovery, households could quickly curb service spending and send the economy into recession, he said. said Brett Ryan, senior US economist at Deutsche. He told the bank, an insider.
“Goods spending is returning to pre-COVID trends, but there is still a long way to go,” Ryan said. “It is the shift from spending on goods to services that can still cause a recession.”
So far, the migration has gone smoothly. Second quarter consumer spending data reflected higher service spending, partially offset by weakness in the commodity sector.
In other words, Americans generally continued to spend in various areas of the economy. Also, the latest retail sales suggest the transition has progressed into his July.