The Great American Spending Spree

The Great American Spending Spree

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With pumpkins, candy wrappers and ghost costumes removed, forecasters expect America’s Halloween spending bills to set records. The average shopper was expected to spend $108 on candy, costumes and decorations during the trick-or-treat season — with total spending expected to exceed $12 billion. But even before the October 31 festivities, it was clear that American consumers were experiencing a sugar rush.

The US economy recorded annual growth of 4.9 percent in the third quarter of the year. The fastest since 2021. Since consumer spending accounts for two-thirds of the economy, much of the jump is due to the sudden shopping spree. Retail sales recorded their sixth straight month of growth in September. US consumer resilience defies the bleak economic backdrop – 18 months of high inflation, high interest rates, and lots of uncertainty. Real consumer spending grew about 2 percentage points more than private sector forecasters expected at this time last year.

What explains durability? Bank of America believes a phenomenon it calls “job inflation” is to blame. It points to a greater willingness to spend on entertainment and live experiences, stemming from pent-up demand, savings and changing consumer preferences. In fact, during the summer, double release of films Barbie And OppenheimerDubbed “Barbenheimer,” the film has become one of the biggest openings ever recorded, despite doubts about the film industry’s prospects in the wake of COVID-19. Morgan Stanley estimated that Barbenheimer and the concert tours of Taylor Swift and Beyoncé added $8.5 billion to the U.S. economy in the third quarter.

But consumer resilience goes back to more than just the “fear of missing out” hype surrounding box office events. Although the jobs market is now cold, employment and wages have held up better than expected, despite tightening US Federal Reserve policies. The lowest-paid Americans saw the strongest wage growth as well. Many have also benefited from savings accumulated during the pandemic, which have been boosted by government stimulus checks. This has driven premium spending on electronics, furniture and home equipment since 2020. At the same time, the proliferation of long-term, fixed-rate mortgages has protected homeowners from higher interest rates.

There are signs of stress. Consumer confidence declined, partly on the back of higher gasoline prices. Credit card delinquency rates are rising, closing savings are being depleted, and student loan payments are returning, after a three-year hiatus. Higher interest rates will further impact in the coming months and pressure spending on goods and services – which account for the bulk of personal consumption.

Far from an inevitable Fed-induced economic slowdown, “functional inflation” may prove to be more than just a hangover from the pandemic. The latest confidence data showed that although plans to purchase items such as cars, homes and appliances fell, as expected with borrowing costs rising, intentions to leave were at their highest levels since 2020.

Generational preferences are one factor. A recent survey by Experian, a credit scoring company, found that about 60 percent of young Americans — the so-called Generation Z and Millennials — would rather spend money on “life experiences” now than on saving. As they get older, they will have a greater influence on spending patterns.

However, targeted marketing via social media, the rapid growth in celebrity fan bases via apps like TikTok, and the faster transmission online of the “FOMO” effect, suggest that demand for experiences – including travel, concerts and dining out – It can be more prevalent across generations. Price is more inelastic than economists expect. If that is indeed the case, the Fed will need to add another pressure to the list of potential long-term inflationary pressures.

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