US consumers are facing the relentless strain of high inflation and high interest rates, and their frustration is growing. According to the latest Consumer Confidence survey from The Conference Board, prices remain a top concern for many, with expectations that both inflation and interest rates will rise over the next year.
Despite weathering high inflation throughout 2023 by tapping into pandemic savings and using credit, consumers are now feeling the pressure. As savings dwindle, wage gains slow, and household debt climbs, many are struggling to manage increased interest payments, leaving less money for other expenses.
Economic Strain on Households
The rise in debt and interest rates means consumers are spending more on debt servicing. This has made it harder for households to repay debt, with delinquency rates rising. According to the New York Federal Reserve, about a third of maxed-out borrowers have fallen behind on their payments in the past year.
Consumers’ financial outlook has darkened since February, with more individuals reporting worsening financial situations and fewer expecting improvement. For four consecutive months, the Expectations Index—measuring short-term outlook on income, business, and labor market conditions—has indicated a potential recession.
Consumer Spending and Retail Impact
With persistent inflation and high interest rates, consumer caution has increased. Retail sales stagnated in April, with spending on cars, sporting goods, and dining out notably weak. Major retailers like Walmart and The Home Depot have noted these trends, with consumers becoming more hesitant to spend on non-essential items and seeking cheaper alternatives.
In May, Walmart and Target announced significant promotions to sustain spending, but these efforts may not be enough. While these discounts help cash-strapped consumers, higher prices for services like housing, utilities, transportation, insurance, and health care continue to squeeze finances.
Shifting Consumer Behavior
The January Consumer Confidence survey revealed that many consumers plan to reduce debt, postpone financed purchases, and save more in response to high prices and interest rates. They indicated plans to cut back on dining out, clothing, entertainment, and vacations, contributing to the recent decline in consumption.
Economic Outlook
Despite these challenges, there are reasons for cautious optimism. Consumers are not expected to cut essential spending, and the strong labor market continues to support incomes. According to the latest CEO Confidence survey, most executives plan to maintain or increase their workforce and raise wages by more than 3% over the next year.
While consumer spending is under pressure, it is unlikely to trigger a recession. As the economy slows, inflation is expected to decelerate, normalizing at the Federal Reserve’s 2% target by 2025. The Fed is anticipated to start cutting interest rates towards the end of 2024, providing some relief to indebted consumers.