The trend among Americans to save less and spend more has been instrumental in bolstering both individual purchases and the broader economy in recent months. However, experts caution that this strategy may lose momentum in the coming year as households seek to rebuild their savings reserves. This shift could potentially lead to weakened consumer spending and render the economy more susceptible to a slowdown or even recession.
Consumer spending plays a pivotal role in driving U.S. economic activity, accounting for approximately 70% of the nation’s GDP. The personal saving rate, indicative of the proportion of income that Americans set aside, stood at 3.8% in January, significantly lower than its recent peak of 5.3% in May of the previous year and the roughly 7% level observed before the onset of the pandemic. Historically, the saving rate has averaged around 6.2%, underscoring the current deviation from typical patterns.
According to Gus Faucher, chief economist at PNC Financial Services Group, consumers are anticipated to respond to reduced disposable income by prioritizing savings in the upcoming year. This adjustment is likely to exert a dampening effect on consumer spending growth throughout 2024. Notably, in January, spending expanded by a modest 0.2%, a notable deceleration from the 0.7% growth recorded in the preceding month.
Several factors contribute to this more cautious approach to expenditure. The impending surge in retirements, with a record number of individuals reaching the age of 65, is expected to influence spending behaviors as retirees transition from employment income to reliance on sources such as Social Security and pensions. Cynthia Woltjer, a retiree from Indianapolis, attests to this shift, highlighting adjustments in her spending habits post-retirement, including reduced dining out and stricter adherence to grocery budgets.
The economic landscape has been notably impacted by the volatility induced by the COVID-19 pandemic. At the height of the pandemic in April 2020, the saving rate soared to an unprecedented 32%, propelled by the infusion of government stimulus checks amidst widespread lockdowns. Conversely, in June 2022, the saving rate plummeted to a low of 2.7% as consumers grappled with surging inflation. While savings initially rebounded as wage growth outpaced inflation, the upward trajectory has since stalled.
Despite concerns regarding diminished savings, consumer confidence in the economy remains relatively buoyant. Many individuals are optimistic about the prospect of averting a recession, despite the Federal Reserve’s aggressive interest rate hikes aimed at combating inflation. The anticipation of potential Fed rate cuts and their anticipated positive impact on borrowing costs has further bolstered consumer sentiment. Additionally, the depletion of pandemic-related savings, which peaked at over $2 trillion in 2021, has compelled many low- and middle-income households to increase spending, thereby stimulating economic activity.
However, experts caution against complacency, citing concerning indicators such as record-high credit card debt and elevated delinquency rates. While neither Faucher nor Gregory Daco, chief economist at EY-Parthenon, predict that a reduction in consumer spending will precipitate a downturn, they acknowledge the possibility of weaker-than-expected expenditure. Wage growth is projected to moderate, and job gains are expected to taper off in the coming year, potentially constraining consumers’ purchasing power.
Despite these uncertainties, economists remain cautiously optimistic, with recession risks having diminished from previous highs. Factors such as solid income growth and sustained job creation could mitigate the adverse effects of reduced consumer spending. However, vigilance is warranted, as unforeseen developments in the economic landscape could influence the trajectory of future growth