Terry’s Columns Consumers, It’s Up to You!

Consumers, It’s Up to You!

By Terry Savage on June 06, 2023

It’s up to you, the consumer, to determine the fate of our economy. While we waited for news about the debt ceiling debate and still wonder about the next interest rate move on the part of the Fed, the real moving force in the American economy is YOU!

Consumer spending accounts for about 70% of all spending (compared to “investment” spending). And not all consumer spending is alike. Some of it is focused on goods, while payments for services account for a growing part of consumer spending.

Some goods are “durable” – -meant to last for years. (Think cars and washing machines in this category.) Some goods have a much shorter lifespan, such as clothing and home furnishings. And some consumer spending is gone before we receive the credit card bill. (Think restaurant meals and grocery purchases.)

Consumer spending on services is equally transitory. A haircut is over in minutes, and a cruise lasts only in your memory and the photos you take. But services spending is consuming more of consumers’ dollars.

The money that passes through consumer’s hands (or credit cards) determines future economic growth. When consumers are fully employed, it’s obvious they will spend more. When consumers are worried about the future, they pull back.

Consumer Confidence
The Conference Board’s recent report shows consumer confidence slipping a bit. While consumers are far from the panic mode they entered at the start of the pandemic, when the survey registered a low point at just above 80, the current survey is nowhere near the 2018 optimism, which drove the index to almost 140.

The latest consumer confidence figures show a slight dip from the previous month to 102.3 in May.
In other words, consumers are not overly enthusiastic about the economy, but they are not (yet?) in panic mode. And in the meantime, consumers keep spending.

Consumer Debt
And, consumers keep going into debt, according to the latest statistics on credit card balances. Consumers now have nearly $1 trillion outstanding on their cards, a record.

Some say that’s only natural since the price of “everything” keeps rising because of inflation. But for many people, rising credit card balances reflect more than inflation; it’s desperation to purchase basic necessities that cost more.

And the interest rates on those balances keep climbing. According to Federal Reserve data, the average rate paid on credit cards in the first quarter of this year was 20.92%! But Bankrate.com reports that if you miss a payment, many cards jump to an interest rate of 29.99%.

The latest employment figures show that the economy is still strong, with payrolls rising dramatically. The headline unemployment figure is up a bit, but there is still a huge gap of unfilled positions, mostly in the service sector. The Fed has been raising interest rates to fight inflation by creating unemployment and slowing the economy. But that strategy hasn’t worked yet. In a few days, they will have to decide whether to raise rates higher, or pause to see if their previous increases have done the job.

Strangely, higher interest rates haven’t had much of an impact on housing prices. The most recent Case-Schiller index actually has housing prices turning up slightly. Likely it’s a lack of supply. Homeowners with 3% mortgages aren’t selling. And while demand keeps growing (despite 30-year fixed rate mortgages now over 7% again), supply isn’t keeping up. That gives landlords an opportunity to raise rents, contributing to inflation.

The Stock Market
Meanwhile, the stock market is far closer to its highs than to the lows many predicted. True, the headline market is being led higher by a small group of tech companies, while broader indexes are about flat for the year. About half the stocks in the S&P 500 index are actually down for the year. But on the surface, the stock market appears as complacent as most consumers seem to be.

So, is this the calm before the storm? What are your spending/saving/investing/ plans for the second half of this year? It’s an individual decision that must be made based on your own financial circumstances. But each individual decision combines with others to have a big influence on the direction of the entire economy.

It’s always smart to consider those decisions early to be ahead of the herd, so you don’t get caught in a panicked stampede. And that’s The Savage Truth.



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