To avoid recession, consumer spending is key

The economy’s recovery from the pandemic shock has been fueled by one force: the consumer. Flushed with savings and buoyed by a hot job market, Americans spent lavishly on goods like furniture and electronics, then on services, including air travel and restaurant meals.

The key question has become how long this level of spending will continue.

Despite the turmoil in global markets, many economists warn there is no reason to panic – at least not yet.

July saw a noticeable slowdown in hiring and the unemployment rate rose to its highest level since October 2021, but consumer spending remained relatively strong. Wages are rising, albeit at a slower pace, and job cuts remain low.

“Overall, there is no evidence of a reduction in consumer spending,” said Gregory Daco, chief economist at consulting firm EY-Parthenon. The strength in spending helped generate stronger-than-expected economic growth in the spring.

The situation may change if the slowdown in the labor market accelerates.

Already, some consumers, especially those with lower incomes, are feeling the twin effects of higher prices and higher interest rates weighing on their finances. Credit card delinquencies are rising, and household debt has soared. Pandemic-era savings have eroded. Americans saved just 3.4% of their net income in June, down from 4.8% a year earlier.

In investor talks and conference rooms across the country, corporate executives are acknowledging that consumers are no longer spending as freely as they once did. And they are bracing for the decline to continue.

“We’re seeing cautious consumers,” Amazon Chief Financial Officer Brian Olsavsky said on a call with reporters last week. “They’re looking for opportunities.”

McDonald’s CEO Chris Kempczinski also noted last week that some lower-income consumers are “pulling themselves out of the market, eating at home and looking for other ways to save money.”

McDonald’s, which saw its global same-store sales (a measure of corporate retail sales year-on-year) fall 1% in the quarter ended in June, tried to attract customers by offering US$5 (S$6.60) meals.

Other fast-food brands are rolling out similar deals. Taco Bell is offering a variety of tacos and burritos for under $3. Burger King is selling its “Your Way Meal” for $5.

Many food manufacturers who are seeing sales decline as consumers buy less or choose cheaper private-label products are also announcing price cuts for some products, larger portions for others and higher sales.

After reporting a 0.5% decline in second-quarter revenue for its Frito-Lay snacks business compared with the same period last year, driven by a 4% drop in volume, PepsiCo executives noted that some consumers were becoming more price-sensitive for some salty snacks, such as Tostitos tortilla chips and Ruffles potato chips.

As a result, the company said it plans to lower prices or increase sales of select snacks.

“You see different behaviors all over the place,” PepsiCo CEO Ramon Laguarta said on a July earnings conference call. “The connecting line would be: the consumer is more cautious, but the consumer is willing to spend money in areas where they see value.”

Retail sales didn’t fall. In June, the latest month for which data is available, they were unchanged from the previous month, according to the Commerce Department, defying expectations for a decline. But retailers are also watching changes in consumer spending.

Amazon’s Mr. Olsavsky said customers were generally shifting to cheaper products. He also noted that purchases of more expensive items had fallen from levels that would indicate a booming economy.

Macy’s CEO Tony Spring described consumers as “pressured, demanding and very picky” during a May earnings conference call.

Gap, the struggling clothing retailer, said in its latest financial report that it is “taking a step back and assessing the consumer environment.”