Although Americans continue to spend profusely, they are more interested in experiences than products.
The truth is more complex and reflects the changing nature of consumer purchasing patterns.
Doomsayers ought to have learnt their lesson after proving to be so repeatedly incorrect in recent years over how the US economy and families would fare after the epidemic. However, they came out in full force when Pool Corp. said late Monday that it was cutting its profitability forecast due to the decline in the number of homes adding backyard pools. This is how Pool phrased it:
"With the peak selling season almost over, the most recent pool permit data suggests a persistently weak demand for new pool construction. We are now convinced that new pool development activity could be down 15% to 20% for the year, with remodel business down as much as 15%."
As seen by Pool's shares falling more than 11% at one point on Tuesday—the worst intraday decrease since 2020—this was obviously a shock. In addition, the stocks of Lowe's Companies, Home Depot Inc., and other companies involved in the construction industry declined in sympathy. "Again, this feels much more like a 1.5% average growth rate economy and not 3.0%," an economist said in a note to clients.
Without a doubt, consumer spending as a whole is down after the remarkable uptick during the epidemic phase. However, this should not be confused with the assertion made by economic Cassandras that consumers are finally collapsing under the weight of credit card debt, exorbitant costs, and excessive interest rates. The truth is more complex and reflects the changing nature of consumer purchasing patterns. Spending on products, such as clothing, appliances, vehicles, and backyard pools, dominated the years 2020–2022, but since then, the proportion of money spent on services has increased. Stated differently, the experiences that provide delight to life, such as traveling, relaxing, eating out, and other activities.
This change was clearly seen on Tuesday when Carnival Corp. increased its profits estimate and said that it was able to hike package rates due to record-breaking cruise demand. The company's stock reached a high point since early January, rising as much as 9.88%. On a conference call with analysts, officials from the firm said that they "see no natural ending point" in the demand.
Not even during Carnival. When business officials presented their financial results last month, Live Nation Entertainment Inc., a concert producer and ticket distributor, was quite optimistic about the prospects for shows. Based on a transcript of the earnings call, the following is a sampling of their remarks:
"We are seeing no weakness, so just to be sure, we hit hard on the consumer demand." The metrics we monitor that indicate us how well the events are selling and how much money customers are spending on the website are still quite high. The performances' sell-through rate is continuously greater than it was the previous year, and the artists' total earnings are also regularly rising. Therefore, there are no problems with fan demand compared to last summer.
However, what about the Commerce Department's closely regarded retail sales data, which revealed that while expenditure on such items had been reduced down in the previous months, it hardly increased in May? The issue with the study is its strong bias toward items, which, as economist Sam Rines of Arbor Data Science noted in a paper published on Tuesday, only account for around 33% of consumers' wallet spending. He said, "That is why it is worthwhile to look at the services side of the economy." Because air travel is often discretionary, whether for business or pleasure, Rines pointed out that it is a good measure of customers' propensity to spend. He added, "Air travel has exploded in 2024 with more travelers than any other period in the post-Covid period." "Air travel has become one of the first places to save money if the consumer is truly strapped."
Not everyone is benefiting from the economy, and a lot of Americans are dissatisfied with everything from rising consumer prices to unaffordable housing. It is plausible, however, that high mortgage rates and property prices are contributing to some of this expenditure, as buyers choose to divert money from their usual down payment and monthly mortgage payments to other uses.
However, the issue facing the doomers is that their pessimistic view is the result of a misreading of household financial statistics. They draw attention to the quick depletion of surplus savings and borrowing. Excess savings shot up to $2.1 trillion in August 2021 compared to March 2020 because of the government's very generous economic assistance initiatives during the epidemic, many of which directly injected funds into the wallets of consumers. Researchers at the Federal Reserve Bank of San Francisco claim that after then, households began to draw on those funds until they were completely exhausted in March 2024. Americans borrowed more money as their surplus savings decreased. A pandemic-era low of $970 billion in April 2021 was replaced by a $1.33 trillion total outstanding credit card debt, according to the Fed.
But it's economic malpractice to give data without a larger context. Even though Americans have been borrowing more and saving less, this is the result of a protracted period of deleveraging. In summary, there is a chance that household balance sheets have never been stronger. In addition to rising a staggering $43.9 trillion since the end of 2019 to a record $160.8 trillion, household net worth has also increased dramatically, from 714.4% to 776.2% as a proportion of disposable income, providing families with greater discretionary money.
Even with all the finger-wringing over borrowing, household debt as a share of disposable income has decreased, according to the Fed, from a high of 117.1% in 2009 to 84.9% in mid-2022 (which itself was down from 87.5%).
In terms of the impact of growing interest rates, household debt service payments represent 9.80% of disposable income, which is somewhat less than the peak of 13.3% in 2007 and 9.97% at the end of 2019. Even though there is evidence of an increase in defaults and delinquencies, these numbers are still well within normal ranges in a normal economy, particularly one where a tight labor market has kept the unemployment rate stuck at 4% or slightly below for the longest period of time since the 1960s.
Should the pandemic period teach us anything, it's that the antiquated economic textbooks that the doomers are depending on are mostly out of date. None of them have any chapters that explain what would happen to the economy if it suddenly pauses, loses around 17 million jobs, shrinks 31%, and then picks itself back up with the aid of about $5 trillion in government handouts. It seems nearly as ridiculous as saying that investors would not only be made whole in a few months but would also have one of the strongest bull markets in history during the early stages of the epidemic, when the S&P 500 Index crashed 34% in a matter of weeks. Whoa, it did really occur, just as the doomers had not predicted.
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