An economist offered an explanation for a paradox evident in recent data that shows spending has remained robust even as consumers report being pessimistic.
Joanne Hsu, director of consumer sentiment surveys at the University of Michigan, said CNBC on Friday She believes Americans have given up on savings plans because they see their financial goals seem less attainable and are spending money instead.
“This positive spending does not reflect consumers’ internalized, secret trust,” he explained. “And instead, my interpretation is that consumers see many of the ambitious goals we talk about as part of the American dream — home ownership, paying college tuition, paying college tuition for the kids, having a comfortable retirement — with high prices and high interest rates in mind “With current interest rates, these ambitious goals appear increasingly unattainable.”
As a result, consumers have “given up” on saving for these goals, Hsu added, noting that the still-strong job market is allowing them to spend now.
The latest reading of the University of Michigan survey showed sentiment fell to a six-month low of 67.4 in May from a recent reading of 77.2 in April, as Americans cited stubbornly high inflation and interest rates and fears of a rise in unemployment.
This report was followed days later by the April’s consumer price index showed that inflation has cooled. This was followed by three months in a row with unexpectedly high prices. Consumer-focused companies have warned of the impact that inflation and high interest rates haveespecially among lower income buyers.
To be sure, inflation has fallen sharply from the four-decade high of 9% in mid-2022 to 3.4% last month. But that means prices are not rising as quickly as returning to pre-pandemic levels, and the cumulative sticker shock of the last few years is still weighing on sentiment.
Meanwhile, consumer demand indicators have held up. It was in the first quarter continued to drive GDP growth. And despite a Weak retail sales reportAnalysts have noted that the overall trend points to further spending.
For now, consumers expect the strong job market to continue, giving them enough confidence to spend, but the latest data shows some softening, Hsu warned.
“This may be an early sign of impending weakness for consumers. But for now, strong incomes are supporting consumer spending,” she added.
But the labor market also showed signs of a bit of a slowdown after the blockbuster gains at the beginning of the year. The Labor Department’s jobs report for April fell well short of expectations, while the unemployment rate rose to 3.9% from 3.8% in March.
A further slowdown in the labor market could also be possible help get the Federal Reserve to start cutting interest rates, This gives consumers a reason to be a little less grumpy.