Why the decline in consumer spending is coming

A shopper walks through a grocery store on July 12, 2023 in Miami, Florida.

Joe Raedle | Getty Images News | Getty Images

As record inflation from more than 8% just a year ago continues to decline, consumers are becoming more confident about the economy and their finances. But Dana Peterson, chief economist at the Conference Board, says businesses need to prepare for a different economic headwind on the horizon later this year and into 2024: a trio of forces that could cause consumers to pull back on spending.

Right now, Peterson says, the data shows that consumers are spending in the economy and that consumer sentiment is turning for the better.

“For the first time in a long time, consumers say they are very optimistic about their current situation and their expectations for the future,” Peterson told CNBC’s Kate Rogers at CNBC’s Small Business Playbook virtual event on Wednesday. “For most of this year, consumers have been saying it’s good right now, but we’re worried about the future; we think a recession is coming.”

This increase in confidence has come as inflation has eased, workers have continued to see pay raises and the job market has remained stable.

Credit card company data also shows that cardholders are continuing to spend. “The consumer has remained resilient so far” Visa CEO Ryan McInerney said during the third-quarter earnings call earlier this week, adding that the data “does not indicate any behavioral change across consumer segments.”

Inflation-adjusted real personal spending hit a new high in June, according to the latest data from the Bureau of Economic Analysis.

But some companies have pointed to signs of consumer slowdown. Active PepsiCoOn last month’s third-quarter earnings call, CEO Ramon Lagurta said consumers are looking for better deals and are shopping more at dollar stores and club retailers. “Every segment of the consumer is making adjustments,” he told analysts on the company’s conference call.

The latest Conference Board survey of CEOs, which Peterson discussed in a follow-up interview on “Squawk Box” Thursday morning, recorded a similar confidence hit, with top executives less pessimistic but still below neutral in their economic outlook. . “Fewer people expect a recession, but they still think something bad is around the corner,” Peterson said.

Despite brighter outlook, most CEOs expect recession, survey finds

The first area of ​​concern Peterson mentioned at the CNBC small business event was the Federal Reserve’s aggressive rate hikes over the past year and a half, an 11 percent increase that pushed the benchmark rate above 5%. “The lagged effect of interest rate hikes will start to hit consumer spending,” Peterson said. As the Federal Reserve raised rates, Peterson said the housing market, car purchases and other big-ticket purchases where consumers would take out credit were clearly affected, but cash and credit card purchases at restaurants and stores were not affected. slowed down. However, “eventually, this debt service will kick in and start at a much higher rate,” he said.

Second, already depleting pandemic-era savings are likely to run out sometime next fall, Peterson said. in December, JPMorgan Chase When the $1.5 trillion in excessive stimulus programs finally runs out in 2023, it “could very well disrupt the economy and lead to a mild or severe recession that people are worried about,” CEO Jamie Dimon said.

Ultimately, Peterson said, restarting student loan payments will reduce costs. After a three-year hiatus, loan payments will be due in October, according to the U.S. Department of Education. About 40 million Americans have nearly $1.8 trillion in student debt, and the typical monthly payment is $350.

“Certainly in the second half of the year, we’re going to see consumer spending be slower,” Peterson said.

However, there is a potential bright side to this scenario with the recent decline in inflation.

“Once inflation really comes down, maybe closer to 3% or even 2%, the Fed will start cutting interest rates,” Peterson said. “We think that will happen in the second quarter of next year, so it’s a bright scenario for (2024) with low inflation, low interest rates and more balanced spending across goods and services.”

The Fed has been more cautious in offering any timetable for inflation to return to its 2% target. At a press conference last week after the latest rate hike, Chairman Jerome Powell said inflation had eased somewhat since the middle of last year but “has a long way to go” to reach the Fed’s 2% target.

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