Americans are still spending money so strongly it’s steering the economy through surging inflation, but rising prices are starting to take a toll on savings accounts and summer vacation plans.
While gas prices have surged since the Iran war began, raising costs for groceries and transportation, tax refunds and stock market gains have been helping buffer the pain for some Americans who are still spending. Although, many Americans are reducing how much money they are saving, data shows.
Overall, consumer spending, which fuels two-thirds of the economy, rose half a percent in April, down slightly from March but a resilient showing, experts say. The strong spending helped the labor market pick up 70,000 jobs in May in leisure and hospitality, much higher than at any point over the past year.
Other signs of strong spending appeared this past week with Macy’s and discount stores Dollar General and Five Below all reporting stronger than expected sales for their most recent quarters. That accelerated a trend of decent sales already reported weeks ago by retail behemoths like Walmart and Home Depot.
However, the spending data obscures a growing list of concerns, and economists expect things could get rockier for spending in the coming months, especially if energy prices remain elevated. On Friday, gas cost $4.22 a gallon on average, much higher than $3 a gallon in December.
Generally, people feel pretty terrible about the economy — consumer sentiment dropped 10 percent in May, according to a gauge measured by the University of Michigan, falling to a record low.
One significant warning sign is flashing: Consumers are dipping into their savings and setting less aside to keep up with their spending. The personal savings rate fell to 2.6 percent in April, the lowest level in nearly four years, and the second poorest showing since the height of the Great Recession.
Inflation, which has remained persistently high and hit 3.8 percent in April, is the likely culprit of the lower savings rate.
“The economy has been somewhat insulated, and everyone has been willing to draw down savings to keep spending going,” said Mark Zandi, chief economist at Moody’s Analytics. “But if things keep going up, increasingly consumers are going to have to pull back.”
Greg Tresley, 54, said he generally aims to save $700 to $800 each month. But with rising prices on gas and groceries, plus a couple unexpected larger expenses, he’s only been able to break even the past few months.
“Basically the air has been coming out of my checking account little by little over the past year,” said Tresley, an IT manager in Langhorne, Pennsylvania.
The toll of rising prices and global uncertainty is weighing on his family. His wife decided against a trip to Arizona to see family, and they’ve stopped driving their 2011 Mustang to avoid any unexpected repairs.
“It’s all home cooking these days,” he said. “We have changed our grocery habits; we look at sale items first.”
Consumer wariness is also starting to show up in other parts of the economy. When Dollar General reported earnings, officials said that they’re seeing more shoppers making more than $100,000 a year, as higher-income families seek out discounts.
“Many of our core customers reported cutting back on other household expenses, including food purchases, due to rising gas prices,” Dollar General CEO Todd Vasos said on the company’s quarterly call, adding that the company was adding more $1 items to appeal to customers. Dollar General increased net sales by more than 3 percent from the same period last year.
Inflation also continues to hit lower-income families especially hard. A May report from the Federal Reserve’s Board of Governors reported that lower-income households showed greater financial strain, while higher-income households remained more resilient. Middle-income families are “squeezing more life out of every dollar before deciding to spend it.”
Higher-income earners are being bolstered by a strong stock market — the S&P 500 is up more than 10 percent for the year — and might not feel the need to save as much each month.
The increase in spending early this year was helped by higher-than-normal tax refunds doled out to taxpayers in the wake of President Donald Trump’s massive spending bill passed last year. Data from banking giant Chase shows that people are spending significantly more at gas stations this month, compared with last year, but that they haven’t really cut back on discretionary spending. Savings levels are also remaining largely stable, Chase said.
But those tax refunds have peaked and are now slowing, said Bank of America economist Aditya Bhave. He has learned not to bet against the U.S. consumer, he said, noting that people find a way to keep spending. But, he said, the risks are now massive.
“I think the true test of consumer resilience is still ahead of us,” he said.
Karen Jenkins, a 54-year-old project manager in Houston, said she deliberately moved close to her office when she recently relocated to the city to avoid putting excess wear and tear on her car. She and her husband generally take a trip to Europe each December, but this year they are on the fence if they’ll make it. They’re watching flights and overall prices and will make a game-time decision this year, she said.
Americans are also increasingly relying on credit cards to buy essentials. Since the pandemic, the National Foundation for Credit Counseling has seen an increasing reliance on credit cards as a “gap filler” for budgets.
“This isn’t a story of people taking exotic vacations or buying nice vehicles,” said Bruce McClary, senior vice president for media relations and membership for the organization.
The payments are piling up for many. Credit card delinquencies for those who are more than 90 days late making a payment hit a 15-year high in the first quarter of the year, according to the Federal Reserve Bank of New York. However, newer delinquencies, for those who are more than 30 days late, held about steady.
As prices rise, Americans are increasingly hunting out deals and sales to save money. In Bay Shore, New York, Sofia Delta, 50, often visits multiple stores to search for deals as she grocery shops for herself and her four children. Delta, who works in banking, said she is cooking at home more and putting groceries on her credit card before paying it off and repeating the cycle.
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