Thoughts

February 24, 2023 | 16:26

What Are Americans Still Buying?

Economist

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Sal Guatieri

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Despite rising loan costs and high inflation, U.S. consumers turned on the jets in January, stoked by unusually temperate weather and a spike in after-tax income. The 1.1% sprint in real spending, following declines the prior two months, has consumers on track for a roughly 3% annualized gain in Q1, double the prior pace. Yet, given that special factors (weather, seasonal adjustment) likely played some role, it's hard to take the pulse of underlying demand. A look at what people are still buying (or not) might shed some light on the outlook for both spending and the economy. We tracked spending over the past six months to iron out the September-October gains that were juiced by early holiday discounting, the November-December losses that marked some payback, and the January spike that was partly due to warmer weather. On this basis, real spending looks to have picked up moderately from an earlier downshift. Here is the breakdown by key categories:

Still going strong:

services: notably hotel stays (travel related), personal care, health care (doctor and dentist visits are still going strong amid catch up from the pandemic), air travel, and recreation (such as sports and live entertainment)
public transportation including taxis and ride-sharing services (reflecting the return to office)

Rising more modestly:

goods: notably furniture and appliances (basically, anything housing-related)
food services: prior to the January spike, people were cutting back on restaurant visits, which is likely a sign of waning discretionary demand by lower-income groups that have largely exhausted excess savings
laundry services and clothing, both supported by the return to office
autos: seeing through part of the January spike and noting that preliminary data suggest new vehicle sales fell by one million in February

Stalled:

gasoline, oddly, despite lower prices and a thirst for travel
recreational goods and vehicles, which were hot in the early days of the pandemic

Cutting back:

groceries: notably, egg consumption has plunged due to soaring prices and worsening shortages due to avian flu ravaging the supply of hens
household supplies, personal care products, and (surprisingly) jewellery (given that upper-income earners still have substantial excess savings)

What can we take away from this mix of strength in some areas but weakness in others? Three things stand out. First, consumers remain keen on buying services, especially anything related to travel or the return to office. And, there is still some “revenge” spending for recreational services. Second, there is less pent-up demand for goods, especially the recreational kind. And third, households are cutting back on things that have become much more expensive, such as food.

The key message is that American consumers continue to chug along on the back of previously deferred services in the pandemic. Excess savings and sturdy job markets are taking the sting out of the rising cost of credit and most other items. So long as two-thirds of the economy continues to plod forward, it should remain on course for either a mild downturn or even a soft landing. But its ultimate fate will be decided by the path for inflation and the Fed.