U.S. consumers ramped up their spending on material goods during the pandemic and haven’t looked back, and economists are wondering just how long the shopping spree will last.
As the chart below shows, consumer spending on goods surged in 2020 even after adjusting for high inflation, while spending on services has rebounded although not yet to its pre-pandemic trend. Just how sustainable is that surge in spending though?
That’s a pretty big question considering that consumer spending is the backbone of economic growth. Shopping has been bolstered by the unusually high wage increases workers have enjoyed amid a roaring labor market, but the Federal Reserve’s anti-inflation interest rate hikes have made the growing mountain of credit card debt more expensive, and banks have gotten more tight-fisted about lending.
Concerns about credit loom larger the more people spend away the savings they stockpiled during the pandemic.
“Positive real disposable income growth and credit have supported spending habits in the near-term, but it’s hard to say this will continue since consumers will eventually be impacted from record-high credit card rates on all-time high outstanding balances,” Jeffrey Roach, chief economist, and Jeffrey Buchbinder, chief equity strategist at LPL research wrote in a commentary. “A slowdown in demand for services looks increasingly likely with consumers under the weight of tighter credit conditions.”