With up to 60% of US consumers living paycheck to paycheck, it’s unsurprising that expenditure cuts have begun.
Even with a solid job market and pay growth and Covid stimulus savings, price increases in essential consumption areas such as food, petrol, and housing are causing more Americans to exercise caution with their finances.
According to a new study conducted by CNBC and Momentive, Americans are increasingly concerned about inflation and the danger of recession and have begun purchasing less across many categories. However, these financial stress points do not just affect low-income individuals.
According to the study, Americans with salaries of at least $100,000 have cut down on spending or intend to do so in percentages comparable to those in lower-income categories.
The consumer group with a high-income level is critical to the economy. While it accounts for less than one-third of customers, it accounts for three-quarters of expenditure.
As Moody’s senior economist Mark Zandi argues, “if high-income individuals are out shopping, we will not significantly impact raw consumer activity.”
Lower-income households are the most vulnerable, and they are the most likely to make unwanted trade-offs to stretch their money as far as it did only a few months ago, according to the poll results.
They are also plainly experiencing increased financial worry, with 57% of Americans earning less than $50,000 reporting that they are more stressed than a year ago, compared to 45% of those earning $100,000 or more.
While the 68 percent of high-income consumers who expressed concern about increased costs forcing them to reconsider financial decisions is much fewer than the 82 percent of Americans with an income of $50,000 or less who expressed this concern, it is still a majority.
Over half of the respondents with household incomes under $50,000 report having already reduced numerous spending due to rising costs. Those with household incomes of at least $100,000 report comparable reductions in dining out, vacationing, and purchasing a car.
“People earning six figures are almost as concerned about inflation as those earning half that amount — and are equally inclined to take efforts to reduce its impact on their life,” said Laura Wronski, senior manager of research science at Momentive.
“Inflation is a cumulative problem, and even the wealthiest individuals will not be immune to the second-and third-order consequences of price rises,” she explained.
Other recent consumer survey data reflects a picture of deteriorating consumer confidence.
Consumers cite lower living standards owing to rising inflation at a higher rate than at any other period in the survey’s history, except during the survey’s two worst recessions in the last 50 years: from March 1979 to April 1981 and from May to October 2008.
According to survey director Richard Curtin, the consumer confidence difference between low and high-income levels always narrows during cyclical troughs and widens at peaks. The gap is currently reducing.
The survey’s sentiment index showed a 13.2-point difference in percentage points between the lowest and highest income groups in January.
This was reversed in March, with the highest income bracket’s attitude falling below the lowest income bracket in terms of overall sentiment and prospects.
In January, the higher income category estimates were 18 percentage points higher.
At the moment, a unique set of factors could be exacerbating this gap narrowing, Curtin said, including the possibility that Russia’s invasion of Ukraine will cause more damage to the global economy than anticipated and the fact that the majority of the population has never experienced inflation of 10% or higher, or mortgage rates of 15%.
“Even when interest rates are lower, they may exhibit behaviors linked with more harsh economic situations in the past,” Curtin explained. “Precautionary considerations have a significant role in upper-income group spending trends,” he noted.
“The American consumer is depressed,” Zandi remarked, referring to the CNBC survey results.
Over two years have passed since the epidemic struck, initially with millions of job losses and severe unemployment, and now with high inflation and “fractured politics also weighing heavily on the public psyche.”
According to the study, all income categories are equally inclined to believe the economy will enter recession this year, at over 80%. However, there is a critical caveat: current economic activity does not imply that this forecast will come true.
Despite their pessimism about their financial positions and reductions in expenditure, Zandi emphasized that consumers are still spending heavily.
There are currently abundant work opportunities, low unemployment, debt burdens are manageable, asset prices are high and considerable excess savings.
Even though consumers are tightening their belts and spending less on some products, the mood has not yet seized hold of spending motivation to the extent that it amounts to more than a slowing of economic development.
“I believe that the American consumer will continue to spend regardless of their attitude as long as the employment market is healthy,” Zandi added.
According to the Conference Board’s newest monthly confidence index, present confidence increased (slightly) for the first time this year, while expectations fell, as consumers cited rising prices, notably petrol.
Lynn Franco, The Conference Board’s director of economic indicators and surveys, said there is still a gap in its confidence data between low- and high-income consumers, much of which is driven by the inflationary environment, with the affluent feeling less of the impact of factors such as gas prices.
While the difference does typically shrink in the run-up to a recession, the evidence currently does not indicate a recession.
Its confidence poll predicts a slowing of growth over the next several quarters, owing to increasing prices and Americans spending less on discretionary products as more of their money goes toward fundamental needs.
While this will be felt most acutely by low-income customers, there is widespread fear about costs rising dramatically in the months ahead – six out of every ten consumers questioned by The Conference Board believe the Russia-Ukraine war will result in large price increases.
“That is widespread, and when combined with rising interest rates, it may make consumers more unwilling to postpone large-ticket purchases such as residences, automobiles, and washing machines,” Franco explained.
“Consumer spending will decline slightly over the next several quarters, but we do not believe it will push us into recession.”
Although the overall confidence level among Americans with a household income of $125,000 has decreased since mid-2021, Franco described them as remaining “relatively confident despite the volatility we have seen.
The indications across income groups point to a softening in consumer spending rather than a severe pullback,” she said.
The Conference Board data, like previous forecasts, is based on the labor market’s critical role in sustaining confidence and offsetting inflation’s negative effect, with Americans reporting that jobs are “plentiful” at an all-time high.
The CNBC Chief Financial Officer Council members have cited a “story of two cities” among consumers, with upper-income bracket customers remaining strong while lower-income bracket consumers are beginning to absorb the stimulus.
There will be a new equilibrium point, and inflation will slow from its current pace but remain elevated. Consumer spending must be weighed against this dynamic, which will play out through the calendar year 2022 and will be most noticeable in the second half of the year.
CFOs closely monitor the fall in consumer savings; the Fed’s performance in utilizing its powers to slow the economy without driving it into recession, such as hiking interest rates to chill consumption and investment; and increasing supply chain stability.
The supply chain continues to be in turmoil due to new Covid variations and the impact of Russia’s conflict with Ukraine on energy and food costs.
However, suppose supply chain pressures relax generally. In that case, inventory will be refilled faster, which may result in further resistance from retailers on price, as consumers also begin to moderate their spending patterns, trading down or trading away from particular categories of purchases.
According to the Conference Board’s most recent CEO poll, businesses are passing on inflation expenses rather swiftly to consumers, which is likely to continue in the months ahead, with wage growth playing a role.
“Based on what we are seeing and hearing from members, these tight labor market circumstances will persist for several months, implying that wage pressure will persist,” Franco added.
As results are reported, the market will be searching for evidence of long-term consumer strength in the face of rising costs.
Conagra’s results earlier this week indicated that the company could not pass on price hikes to its bottom line compared to input costs. Still, CEO Sean Connolly stated on Thursday that “customer demand has remained robust notwithstanding our pricing initiatives to date.” Conagra intends to boost prices further.