Growth in Consumer Spending is Slowing

U.S. consumers are still buying more than last year, but spending growth is slowing as the economy settles down amid higher interest rates intended to reduce inflation, National Retail Federation Chief Economist Jack Kleinhenz said today.

“The economy was more resilient in the first half of this year than many expected, and the consumer environment has been positive as inflation has slowed,” Kleinhenz said. “Nonetheless, there are ongoing economic challenges and questions, and the pace of consumer spending growth is becoming incrementally slower.”

Kleinhenz’s comments came in the August issue of NRF’s Monthly Economic Review, which said gross domestic product grew at a 2.4% annual rate adjusted for inflation in the second quarter. That was up from 2% in the first quarter but in line with 2.1% for all of 2022 and far below the 6% seen in 2021.

According to the U.S. Bureau of Labor Statistics, food inflation in the United States fell to a nearly two-year low of 4.9% year-on-year in July 2023, from 5.7% in the prior month to a peak of 11.4% in August 2022. Prices slowed down for food at home (3.6% vs 4.7% in June) and food away from home (7.1% vs 7.7%).

According to Trading Economics global macro models and analysts expectations, food Inflation in the United States is expected to be 4.50 percent by the end of this quarter. In the long term, food inflation is projected to trend around 3.50 percent in 2024 and 3.40 percent in 2025.

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“Consumers are still spending but are under financial pressure and have been adjusting how much they buy while also shifting from goods to services,” Kleinhenz said. “While job and wage gains have counterbalanced inflation, the stockpile of savings accumulated during the pandemic is dwindling and is no longer providing as much spending power as previously available.”

Consumer spending, which makes up about 70% of GDP, played a significant role in the continued expansion. But year-over-year spending growth slipped from 4.2% in the first quarter to 1.6% in the second.

Retail sales as calculated by NRF – excluding automobile dealers, gasoline stations, and restaurants – were up 3.1% unadjusted year over year in the second quarter. That kept up with inflation but was below the 4% growth for the year’s first six months.

The Personal Consumption Expenditures Price Index – the Federal Reserve’s preferred measure of inflation – was at 3.7% year over year in the second quarter. That was down from 4.9% in the first quarter but still far above the Fed’s target of 2%. The Fed responded by raising rates another quarter-point last month to a range between 5.25% and 5.5%, the highest level since January 2021.

While the Fed still faces “a tricky job” in controlling inflation without triggering a recession, “the current framework clearly increases the chance of a slower economy,” Kleinhenz said.

The full impact of rising interest on the economy is difficult to predict. Still, revolving credit (mostly credit cards) contracted by nearly $1 billion in June, and consumers are less likely to use credit cards to fund purchases as rates rise, Kleinhenz said.

The labor market is also in lower gear. The 185,000 jobs added in June was the lowest number since mid-pandemic in December 2020, and the 187,000 jobs added in July was only slightly better. There were 9.58 million job openings in June, down slightly from 9.62 million in May.

The Share of Income Spent on Food Increased by 13 percent in 2022

U.S. consumers spent an average of 11.3 percent of their disposable personal income (DPI) on food in 2022, a level not observed since the 1980s.

DPI is the amount of money U.S. consumers have left to spend or save after paying taxes.

USDA Economic Research Service’s Ag and Food Statistics reported that consumers spent 5.62 percent of their incomes on food at supermarkets, convenience stores, warehouse club stores, supercenters, and other retailers (food at home) in 2022 and 5.64 percent on food at restaurants, fast-food establishments, schools, and other places offering food away from home.

In 2022, the share of DPI spent on total food had the sharpest annual increase (12.7 percent). This followed an 8.2-percent decline, the strongest annual drop in total food spending since 1967, during the first year of the COVID-19 pandemic in 2020. The recent volatility in spending was driven by consumers’ sudden drop in eating out at the beginning of the pandemic, followed by a return to food-away-from-home purchases as pandemic-related restrictions and concerns eased.