Retail Spending Expected to Decrease in 2024
The U.S. economy is projected to experience a significant slowdown in the coming months as American consumers reign in their spending, according to a recent note from Wells Fargo. Scott Wren, senior global market strategist at Wells Fargo, cautioned that retail spending is likely to decline throughout 2024 as the job market weakens and layoffs become more prevalent. “Americans with jobs and money in their pockets are going to spend,” Wren wrote. “However, as the economy slows…we continue to believe the holiday spending that occurred last year was a bit of a last hurrah for the consumer.”
Consumer Spending Contributed to Economic Growth in 2023
Consumer spending played a crucial role in driving the economy forward throughout 2023, despite high inflation and interest rates. The most recent government report indicates that the economy grew by 3.3% in the fourth quarter, largely fueled by robust consumer spending. However, the report also revealed that households were depleting their cash reserves. Personal savings decreased from $851.2 billion in the third quarter to $818.9 billion at year-end, while the personal savings rate dropped to 4%. This trend raises concerns about the sustainability of consumer spending as individuals resort to drawing down savings or taking on more debt to maintain their spending levels.
Record-High Household Debt and Increased Reliance on Credit Cards
By the end of the third quarter, U.S. household debt reached a record high of $17.3 trillion, with credit card debt alone totaling $1.08 trillion. A separate report suggests that Americans increased their spending during the crucial holiday season but did so by accumulating debt. Retail sales in December rose by 0.6%, surpassing expectations. However, Wells Fargo’s Wren does not believe that strong holiday sales indicate continued spending strength throughout the year. He anticipates a noticeable economic slowdown in the middle of the year and advises consumer-product companies to exercise caution.
Inflation and Price Tag Fatigue Impact Consumer Finances
While inflation has decreased from its peak of 9.1% in June 2022, it remains above the Federal Reserve’s target of 2%. Compared to January 2021, prices have surged by a staggering 17.6%. High inflation has placed significant financial strain on U.S. households, particularly low-income individuals who bear the brunt of price fluctuations. Food prices have risen by 33.7%, shelter costs by 18.7%, and energy prices by 32.8% since the beginning of 2021. Moody’s Analytics calculations reveal that the average U.S. household needed to spend an additional $211 per month in December to purchase the same goods and services as the previous year due to persistent inflation. Compared to two years ago, Americans are now paying an average of $1,020 more each month.
As the U.S. economy braces for a cooling period, consumer spending is expected to decline. The combination of a slowing job market, rising layoffs, record-high household debt, and the ongoing impact of inflation creates an uncertain financial landscape for American consumers.