I had mentioned the other day that the Fed will most likely hammer the American consumer later this year because they can't be controlled any other way. The market wants consumers to, well, consume. The Fed wants consumers to calm down, maybe save some money. This is the battle I've seen coming for a couple of months now. I don't think this ends well for those with debt. Below is a good article on the subject from Barron's:
Why Americans Are Still Splurging Even as Inflation Bites
Airfares and hotel prices might be soaring, but that won’t stop Sophie Tsagronis from traveling to attend six weddings this year.
With the Covid-19 pandemic in the rearview window, Tsagronis, 26, believes it’s important to spend time with family and friends, even if she needs to splurge on travel costs to do so. “Travel is one of those luxuries that I’m not really willing to pull back on,” says the Memphis-based public-relations professional, who notes that she’s looking to pinch pennies elsewhere.
Persistently high prices are forcing many Americans to get creative with their budgets. More than eight in 10 have implemented cost-saving measures this year, according to a survey of more than 2,000 U.S. adults conducted in May 2023 by The Harris Poll. Many consumers are trading down, shopping at less expensive retailers, or substituting cheaper alternatives for name brand products. And that trend is likely to continue, so long as inflation remains around 4% on an annual basis, as was the case in May.
Yet, like Tsagronis, a majority of Americans are cutting back on everyday purchases to afford the occasional splurge, Harris found. FIfty-four percent of those surveyed said they succumbed to the allure of splurging in 2023—a trend especially prevalent among the millennials Harris surveyed.
The Harris Poll labeled the scrimp/splurge phenomenon a “split-brain” budget, but others have called it “the lipstick effect.” That’s because research has shown that lipstick sales tend to pop during recessions, even when consumer spending is otherwise depressed. Buying decisions are less a matter of “or” but “and,” according to McKinsey, a pattern often seen during economic downturns.
“It is both surprising and fascinating to witness Americans adopting a conscious approach to balancing their expenses, making deliberate choices to cut back on essentials while treating themselves to the luxuries that bring them joy,” says Abbey Lunney, managing director of thought leadership and trends at The Harris Poll.
Many spending categories considered more “luxury” than everyday—including beauty, travel, and entertainment—have seen an uptick since the Covid pandemic. While the pandemic helped shift consumers’ thinking toward indulgence, higher paychecks help explain this trend, too. Wages in the U.S. have grown by 10.7% over the past two years, according to the Bureau of Labor Statistics.
Beauty sales have climbed about 4% a year in the past three years, although McKinsey projects they will grow by 6% year-over-year in the coming half-decade. “With consumers focused on their mental wellness more than ever before, beauty products are benefiting,” Larissa Jensen, an executive at Circana, a data provider for the consumer sector, said at a recent event.
Travel and entertainment are bigger-ticket outlays, but the story is similar there. Half of Americans plan to take a summer vacation this year, complete with an overnight stay at a hotel or other paid lodging, according to a Deloitte report released in May. The Transportation Security Administration said it screened more travelers during this year’s Memorial Day weekend than in 2019—and the volume of passengers traveling on the Friday of the holiday weekend hit a postpandemic record.
Meanwhile, Live Nation Entertainment [ticker: LYV] expects concert and event attendance in 2023 to outpace 2022.
When consumers practice restraint, they are much more likely to treat themselves after it is no longer necessary to curb their impulses, researchers at the University of Michigan found. That makes sense especially after so many people were unable to travel, attend live events, or spend in-person time with others during the pandemic years. “People want to live again,” says Wendy De La Rosa, a professor at The Wharton School at the University of Pennsylvania, who focuses on behavioral science and the impact on consumers’ financial well-being.
For Tsagronis, there is a desire to rebuild community after the pandemic, which she says makes her feel less guilty about spending money on dining out. “Whether I go to Kroger or to a restaurant, it’s expensive, but if I’m going to a restaurant that’s [run by] a local business owner, I feel like I’m supporting something a little bit more important,” she says.
Perhaps it is no coincidence that the demand for experiences and the tendency toward indulgence come when American wages have jumped, because of labor shortages and bursts of increased consumer demand. But higher paychecks have been tempered by high inflation, and the diminished spending power of wages doesn’t always click with consumers. “People are much more likely to pay attention increases in their income compared to increases in their expenses,” De La Rosa says.
The timing of a paycheck also has an impact. The more frequently you get paid, the richer you feel, De La Rosa says, adding that she is seeing increased payment frequency proliferating mostly for lower-income workers who have been hit harder by the effects of inflation.
Uber UBER +0.37% drivers, for example, can cash out their earnings up to five times a day, while Amazon Flex gives workers the option to be paid daily.
Higher spending on luxury goods and experiences is welcome news for many industries hurt by pandemic-related closures, including travel, events, and hospitality. But it also makes the Federal Reserve’s job of bringing inflation down to its 2% target more challenging.
The Fed has raised interest rates 10 times since the start of March 2022, to a target range of 5.0% to 5.25% in May, in a bid to cool demand, and inflation. If spending across the economy doesn’t abate, the Fed will need to keep hiking rates, as Federal Reserve Chair Jerome Powell said at a press conference Wednesday.
Nearly a third of people surveyed by Harris admit they are spending above their means, including half of millennials. That’s another concern: The personal savings rate was down to 4.1% in April, well below the average of more than 8%, and the credit-card interest rate is 20.69% this month—the highest rate on record.
Consumer spending increased 0.8% month over month in April, ahead of expectations. “People are continuing to spend as though there’s no recession coming,” De La Rosa says.
Things might work out: Inflation could fall in coming months, and the Fed could stop raising rates, making consumers feel richer. Meanwhile, watch the lipstick.
AI
