Why Americans are not spending like they used to

Why Americans are not spending like they used to

Americans remain cautious on spending, and the scars left by the recession may make that persist

For many Americans, the big lesson from the financial crisis was that they needed to be more careful with their money. As recent economic data show, that pattern of behaviour was not something they were going to unlearn just because of a changing of the guard at the White House

People socked away a bit more of what they made in February, the Commerce Department reported Friday. Personal income rose by 0.4 % from a month earlier, but spending rose by just 0.1%, and fell 0.1 % in inflation-adjusted terms. That pushed the saving rate to 5.6 % from 5.4 % —its highest level since before the election.

Spending 1

The weakness of the spending figures prompted economists to take down their already low gross-domestic-product estimates another notch. Barclays, for example, reckons that GDP will grow at just a 1.4 % rate in the first quarter versus its earlier forecast of 1.6 %. Surging consumer confidence notwithstanding, anybody who thought that the election of Donald Trump was going to unleash stronger spending has so far been wrong.

The hope is that the combination of a surge in business optimism and a tightening labour market will push wages higher, and that will lead people to spend more. But even if those income gains do, in fact, come, people may be more careful with their spending than investors reckon.

The scars of the financial crisis and the deep recession that followed it are deep. Lost jobs and lost homes are not easily forgotten, and even people who stayed on their feet probably were a bit shaken. That could affect spending patterns for years to come.

Spending 2

Indeed, preliminary work by University of California, Berkeley economists Ulrike Malmendier and Leslie Shen finds that households that have lived through a high-unemployment environment spend significantly less over their lifetimes than those that have not. The chastened households also shift their spending in other ways, gravitating toward on-sale items, off brands and lower-end products. The experience seems particularly salient for people who were young when unemployment was high. For that reason the millennials now entering their prime spending years, and who count as America’s largest living generation, may be particularly affected by the recession experience.

The upshot may be that wage gains will not flow as easily into spending gains as in the past. Moreover, the additional care that people take on spending may make it difficult for companies to pass the higher labour costs that come with rising wages on through to consumers. That could keep a lid on inflation even as the job market tightens, but it would then present a problem for profit margins.

Making consumer spending great again could be a very hard thing to pull off.


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