For years, American consumers have defied predictions, propelling the economy forward with their spending habits even as they face numerous financial challenges. However, signs of financial strain are becoming evident as households contend with the highest inflation rate seen in nearly three years.
Consumer spending accounts for approximately 70% of U.S. economic activity, raising concerns about a potential slowdown if Americans decide to cut back amid the ongoing surge in energy prices.
Glenn Williams, CEO of Primerica, a financial products provider, stated, “If gas prices remain high, middle-income families will likely face more difficult choices. For most households, gas is a necessity — it’s essential for commuting to work, taking care of their families, and managing daily life.”
Inflation tends to disproportionately affect low- and middle-income households because they allocate a larger portion of their income to essentials like gas and food.
Despite these challenges, consumer spending continues to grow, and overall, U.S. households remain on solid financial ground. Driven by strong corporate profits, the stock market has reached a series of record highs, benefiting investors.
However, with the nation’s GDP growing at a modest 1.6% annual rate in the first quarter, some experts warn that consumers might soon exhaust their momentum. Read on to discover what concerns are keeping some economists awake at night.
Income growth lagging inflation
Two key inflation metrics — the Consumer Price Index and the Personal Consumption Expenditures (PCE) price index — show that many Americans’ incomes are falling behind inflation. That means millions of households are losing purchasing power as consumer prices outpace their income.
“After adjusting for inflation, household income is down more than 1% over the past year — the type of drop normally associated with recession,” said Gus Faucher, chief economist at PNC, of the latest PCE data.
He added, “Excluding the pandemic era and distortions caused by changes in tax rates in 2013, this is the largest year-over-year decline in real after-tax income since the Great Recession in 2009.”
Rising credit card delinquencies
Credit card delinquencies across the U.S. have reached their highest level since 2011, when the economy was still recovering from the Great Recession, according to recent data from the Federal Reserve Bank of New York.
This rise in missed payments signals that more consumers are struggling to meet their financial obligations, according to economists. Nationwide, about 13% of all credit card accounts were in arrears in the first quarter, according to data released this month by the bank.
Savings rate slides to 22-year low
The personal savings rate fell to 2.6% last month from 3.6% in March, the April PCE report showed on Thursday. That represents the lowest savings rate for Americans in two decades, said Heather Long, chief economist at the Navy Federal Credit Union.
“The savings rate a year ago was 5.5%. Now it’s 2.6%. The larger tax refunds are helping keep people afloat, but those will be exhausted by July. Belt-tightening is inevitable later this year,” she said in an email.
More 401(k) loans and hardship withdrawals
More Americans are taking out loans and making hardship withdrawals from their 401(k)s, according to Fidelity.
In the first quarter, 19.2% of Fidelity accounts had outstanding loans, up from 18.8% a year earlier. Hardship withdrawals, made for serious financial issues such as paying for medical care or avoiding eviction, rose to 2.5% in the first quarter from 2.3% a year earlier.
Cutting gas purchases
This year’s surge in gasoline prices is hitting households differently depending on their incomes, according to recent New York Fed research.
Lower- and middle-income households cut their gas consumption in March, when fuel prices began rising due to the Iran war, even as their overall spending climbed, the researchers found. By contrast, high-income households barely changed their driving habits, the researchers found.
“Our data shows 80% expect gas prices to rise over the next few months, and many households are responding by delaying major purchases, putting off maintenance or scaling back savings,” Primerica’s Williams said.
Some retailers are seeing similar signs of strain. Walmart said its customers purchased less fuel when filling up during the first quarter.
“The number of gallons that customers fill up with when they come to our fuel stations fell below 10 for the first time since 2022,” Walmart Chief Financial Officer John David Rainey said in a call with Wall Street analysts earlier this month. “That’s an indication of stress.”
