What it means for stocks

  • Americans are starting to tighten their belts in the face of inflation and rising interest rates.
  • The slowdown in spending may come faster than the Fed expects and could signal a recession.
  • Here’s why spending is likely to slow, and why it could mean more turmoil for markets.

Americans look poised to start cutting back on spending as the effects of inflation and rising interest rates finally begin to bite.

Retailers and others believe consumer spending is likely to ease after starting the first weeks of 2023 on the rise.

Over the past year, the Federal Reserve has raised interest rates from near zero to nearly 5%, in part to encourage savings as it tries to reduce red-hot inflation.

Consumer spending has proven remarkably resilient in the face of it all. Wage inflation has more than offset the pain from price inflation, especially given the brisk pace of job growth, according to Bank of America’s Aditya Bhave.

“But when that momentum slows, even if price inflation eases a bit, you’ll see consumers start to tighten their belts,” the bank’s senior economist said.

The Fed may stick to its aggressive monetary tightening, even so. It could lead to a recession and more turmoil for markets, some analysts say.

What happens?

Economic data showed Americans were still spending in the first weeks of 2023, well after nearly three years after a historic spree began in the wake of stimulus packages handed out at the start of the COVID-19 pandemic.

Bank of America analysts found that household spending on credit and debit cards rose more than 5% in the year to January. Meanwhile, the Fed’s preferred PCE inflation gauge showed a 1.8% jump in consumer spending that month, compared with December.

That suggests the central bank’s aggressive rate hikes over the past year have yet to dent demand — a “very worrying” development that makes a recession more likely, according to former Treasury Secretary Larry Summers.

But the tide on spending could be turning.

Top retailers Target, Macy’s and Best Buy all said they are preparing for the world to cut back on spending in 2023, noting that shoppers are actively looking for discounts.

The latest US credit and debit card data for February also suggest spending is slowing, Bhave told Insider.


American households are feeling the pinch of rising prices for everyday food items, and that may be making them think twice about opening their wallets.

Target CEO Brian Cornell said his company was seeing a marked change in grocery aisles.

“Spiraling inflation has forced families to put discretionary shopping on hold and focus most of their spending on essentials,” Cornell said in an earnings call.

David Marcotte, senior vice president at Kantar Retail, suggested that broad-based price pressures are not what’s driving the turnaround.

“On the consumer side, they keep coming across that one item that sticks in their head,” Marcotte told CNBC. “Right now, eggs — which I can’t imagine — eggs as the big item. That’s what they’re benchmarking.”

It’s fair to say that most analysts didn’t expect consumer spending data to be so resilient in January – and some are suggesting that these figures may be exaggerated.

Ryan Sweet, chief US economist at Oxford Economics, said there were a number of factors last year that meant spending growth could be a “flash in the pan”. They include milder weather and cost-of-living adjustments.

“I think the February and March numbers will probably be much weaker than what we saw in January, from a consumer spending perspective,” Sweet told Insider.

Meanwhile, Wells Fargo estimates that Americans have 10 months of spending if they continue to tap into their savings at the current interest rate.

But Sweet believes the data could be misleading, as it is mostly accumulated by wealthier households who are unlikely to spend it like those with lower incomes.

What does it mean for markets?

A drop in consumer spending could signal the start of a sustained decline in US demand. However, there are concerns that the decline may come faster than the Fed expects.

Higher central bank interest rates have depressed asset prices, sending stocks lower as they ultimately mean less profit for companies. Major US stock indexes fell in 2022 as investors grew worried that the Fed would lead the economy into recession.

“The Fed will be OK with a slowdown in the consumer, even to the extent of what we’re seeing,” Bhave said, noting that Bank of America expects a mild recession in the third quarter of 2023.

“They’re not going to officially say they want to cause a recession. But they’ve basically indicated they’d be OK with a recession because that way you get inflation back to 2 percent.

Sweet concerns that the wave of positive but temporary data has made Fed Chairman Jerome Powell overly concerned about inflation.

He expects three more 25 basis point hikes this year, but has not ruled out a “shock and awe” moment of a 50 basis point hike at the next meeting of policymakers.

“They’re going to break something. They’re going to break inflation, which is their goal. But unfortunately, they may also break the economy,” Sweet said.

“That’s a big risk to the forecast — that the Fed goes more aggressive than either the markets or we expect, and that pushes us into a mild recession.”

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