Consumer Health: Spending and Savings Trends

As the holiday season approaches, disposable income tends to disappear. This year, as inflation continues to run rampant and interest rates continue to rise , one could argue that consumers are facing a bigger dilemma than they probably have in the recent past. During the pandemic, overall savings increased as government subsidies were handed out and some people even saw expenses fall. During this period, consumer spending continued to rise.

Savings dropped, but spending continued

As things began to normalize, savings dropped and government subsidies stopped , but the spending continued which partially contributed to the inflation we are seeing. With current inflated prices, consumers are likely feeling the pinch and spending should slow, but it seems to have been quite resilient in 2022.

If consumers aren't seeing wage increases that stay on pace with inflation and things, in general, are more expensive, how are they maintaining their spending habits? Is it through their accumulated savings from Covid or is it through additional debt? Maybe it's both.

With higher household bills and higher prices at every turn, whether it be at the grocery store or the pump, consumers should be reducing their spending. However, some key consumer economic data is not suggesting a slowdown in spending despite weakness in overall consumer confidence in the economy for the upcoming year.

Many economic numbers such as U.S. Disposable Personal Income continue to point towards a strong consumer. Despite having dropped from its circumstantially driven high pandemic level, U.S. Disposable Personal Income remains above their pre-Covid levels. In addition, the U.S. Consumer Spending Data[1] continues to move higher which may be explained (to an extent) by higher prices stemming from inflation.

The U.S. Personal Savings Rates spiked during Covid as spending options and many expenses were scaled back, but they have since come back down—trending at levels below their 10-year and 25-year averages. This suggests higher prices are causing consumers to save less than they typically would. If we consider the very high inflation rate, we're currently facing then any level of savings or disposable income should be considered a positive sign.?

While the economic numbers have moderated since the Covid peaks, they're still suggesting a somewhat relatively healthy consumer. During the most recent quarterly earnings calls, commentary from many large companies seemed to suggest there is an anticipated slowdown in spending as they expect weaker purchases from consumers.

Although many people are expecting a slowdown, we're not quite seeing it in the economic numbers yet, despite household expenses being driven higher by high inflation and higher interest rates. Perhaps this is more of a timing issue.

Consumers are feeling inflation costs, so why do they continue to spend?

Consumers are feeling the inflated costs of living, but that is only one side of the coin. Perhaps consumers continue to spend because the lag effects of interest rate hikes are not being felt quite yet. Typically, central bank rate hikes take an average of six to 12 months to cycle through and impact the economy. We have yet to see a big impact on growth and on employment from the rate hikes. However, many companies are signaling their intentions of laying-off workers. This will push unemployment off its current lows.

Consumers are viewing the current economic environment as one where they are comfortable to continue spending. If we fast-forward six months from now, this is unlikely to be the case. The impact of higher costs coupled with a weakening economy and lay-offs will strain the consumer. This seems to be what corporate CEOs are pointing towards in the quarterly conference calls. While drawing on savings can allow consumers to maintain their spending for some time, ultimately, savings should be viewed as savings. They shouldn't be used as, a bank account for discretionary spending when consumers choose to continue spending beyond their means.

What can consumers do to help curb their spending?

Consumers will need to curb their habits and tighten up where needed, especially with the prospects of slower growth and a weaker economy in the coming year. The knock-on effects will be seen within the consumer sectors as companies continue to pass inflated costs onto consumers as much as possible.

As companies see pressure on their margins, they will look to control expenses any way they can. This usually means reigning in costs, more specifically cutting labour costs in the form of lay offs. Unfortunately, some people may be faced with a double-edged sword, not only as a higher cost of living, but also as a lower income stream if their hours or jobs are cut.

With that as a baseline for the coming year , investors should take a moment to consider their household income statement to ensure?their current income needs are aligned with their expenses and spending habits. At times, some may see fluctuations in income and match it with a nearly equal increase in spending. However, when income falls, spending often stays the same or falls to a lesser extent.

This can lead people to using debt or using savings when it's not a part of their financial plan to do so at that moment. Taking steps to ensure you have a solid financial plan and a healthy household "profit margin" will allow for flexibility if the economic environment proves to be more difficult than initially anticipated.

For more information about managing your spending and debt, please contact your CIBC Advisor or contact us directly and we’ll help you find the right Advisor. We’re happy to discuss your financial goals, how to invest wisely and smart ways to manage credit.

This content was created by CIBC Private Wealth’s Investment Strategy Group. CIBC Private Wealth offers customized support and advice to help achieve your wealth goals, including private banking, investment advice and management as well as trust services.