Why a decline in consumer spending is coming

As record inflation, which topped 8% just a year ago, continues to fall, consumer confidence is growing about the economy and their finances. But Conference Board chief economist Dana Peterson says businesses should prepare for another economic headwind looming later this year and into 2024: a trio of forces that could cause consumers to cut their Hold back expenses.

Currently, Peterson said the data suggests that consumers across the economy are spending more money and consumer sentiment has taken a turn for the better.

“For the first time in a long time, consumers are saying they are very optimistic about their current situation and their expectations for the future,” Peterson told CNBC correspondent Kate Rogers at CNBC’s “Small Business Playbook” virtual event on Wednesday. “For most of this year, consumers said everything was fine now, but we are worried about the future; we believe a recession is coming.”

This boost in confidence came as inflation eased, workers continued to see pay increases and the job market remained stable.

Data from credit card companies also shows that cardholders continue to spend. “The consumer has remained resilient so far” Visas That’s what CEO Ryan McInerney said during the company’s third-quarter earnings call earlier this week, adding that the data “did not indicate a change in behavior across consumer segments.”

Real personal spending adjusted for inflation reached a new high in Juneaccording to the latest data from the Bureau of Economic Analysis.

However, some companies have pointed to signs of consumer austerity. At PepsiCoIn last month’s third-quarter earnings call, CEO Ramon Lagurta said consumers are looking for better deals and shopping more at dollar stores and club retailers. “Every consumer segment is making adjustments,” he told analysts on the company’s conference call.

The most recent Conference Board survey of CEOs, which Peterson discussed in a follow-up interview Thursday morning on “Squawk Box,” noted a similar increase in confidence, with top executives less pessimistic but still at a lower rate of their economic outlook neutral value. “Fewer think there will be a recession in the future, but they still believe something bad is coming,” Peterson said.

Peterson’s first concern, outlined at the CNBC small business event, concerns the Federal Reserve’s aggressive rate hikes over the last year and a half, 11 rate increases that have pushed the federal funds rate above 5%. The “delayed impact of rate hikes will begin to impact consumer spending,” Peterson said. As the Federal Reserve has raised interest rates, Peterson said there has been a significant impact on the housing market, car purchases and other large purchases for which consumers borrow, but has not slowed cash and credit card purchases at restaurants and stores. But “ultimately, debt service will kick in, and at a faster pace,” she said.

Second, pandemic-era savings, which have already been depleted, are likely to run out sometime next fall, Peterson said. In December, JPMorgan Chase CEO Jamie Dimon said that when the $1.5 trillion in excess stimulus finally expires in 2023, it “could very well derail the economy and trigger a mild or severe recession that people are worried about.” “

Finally, Peterson said resuming student loan payments will reduce spending. According to the U.S. Department of Education, loan payments will be due in October after a three-year pause. It is estimated that about 40 million Americans owe a total of nearly $1.8 trillion in debt from their education, and the typical monthly bill is $350.

“Certainly we will see a decline in consumer spending in the second half of the year,” Peterson said.

However, there may be a positive side to this scenario, related to the recent decline in inflation.

“Once inflation gets really close to falling, maybe to 3% or even closer to 2%, the Fed will start cutting interest rates,” Peterson said. “We expect this to happen in the second quarter of next year, so that is a promising scenario.” [2024] where there is lower inflation, lower interest rates and a more balanced level of spending between goods and services.”

The Fed was more cautious in proposing a timetable for inflation to return to its 2% target. During a news conference last week after the latest rate hike, Chairman Jerome Powell said that inflation had eased somewhat since the middle of last year but that “there is still a long way to go” to reach the Fed’s 2 percent target.