A New Worry: Consumer Spending Slowdown

As corporate profits have risen, inflation softened, and speculation about when the Federal Reserve would begin to lower interest rates, something of concern has been moving in the background — consumer spending.

According to recent U.S. Bureau of Economic Analysis data, consumer spending represents approximately 68.9% of gross domestic product. Let that sufficiently slip and the economy could slide into a recession.

The BEA’s personal incomes and outlays report for April 2024, released on May 31, 2024, was not pleasing in real terms — that is, after the effects of inflation. Real disposable personal income (DPI) and real personal consumption expenditures (PCE) were down 0.1% in April from March.

The Wall Street Journal wrote: “It seems that the cumulative impact of years of inflation is finally catching up with consumers and eroding their savings cushion—something that companies selling discretionary goods from Starbucks to Kohl’s are saying in their public reports. BMO Capital Markets Chief Economist Scott Anderson noted that April’s savings rate of 3.6%, while unchanged from March, was well below the 12-month average of 5.2%.”

Last fall, a Federal Reserve Bank of San Francisco analysis of savings from the pandemic rescue funds, which had enabled new levels of savings credited with helping to drive down credit use and reduce poverty, projected that the excess savings would be gone by the end of October.

Credit card and revolving credit consumer debt crossed the trillion-dollar mark on Wednesday, July 26, 2023, and has since marched upward to maintain an even higher historical crest of around $1.05 trillion.

“These factors help explain why real spending — which excludes the impact from inflation — fell in April, with consumers shelling out less on cars, restaurants and recreational activities,” Bloomberg wrote. “With the job market also cooling, companies like Best Buy Co. have noticed a change in recent months as shoppers switch to cheaper brands.”

The Journal noticed the same thing. Store brands are increasingly taking up space in shopping carts. “National brands are still king in the U.S., making up 78% of overall food and beverage dollar sales, according to data from the market-research firm Circana. But store brands, manufactured by companies including TreeHouse Foods for such retailers as Walmart and Kroger KR are gaining ground, raising pressure on big food companies that have pushed their prices higher.”

So, inflation growth is slowing but still increasing. Although many economists say people should be more positive, that’s based on average numbers. The Federal Reserve Bank of Atlanta’s distribution of individual wage growth shows that since at least April 1997, average wage growth has been above median growth because of top-weighting. The percentage growth for the 75th percentile has always been the highest. The 25th percentile has been the lowest over the whole period and under 0% for the longest period. One of its highest points — a run of 0% — was from March 2022 to March 2023.

During most of the recent inflation rise, median wage growth hasn’t been high enough to overcome accumulated price increases, which means at least half of the population is lagging behind. That could put an eventual damper on the economy.

There’s a dual impact that could happen on commercial real estate. If things really slow, the Fed might find it necessary to lower rates to stimulate the economy. In theory, that could ease pressures on refinancing property loans. At the same time, a recession can have negative impact on CRE, especially in areas like retail, multifamily, industrial, and office.