SouthernWorldwide.com – For an extended period, American consumers have defied economic forecasts and sustained the nation’s economic growth through their spending, even when faced with numerous financial challenges. However, indications of financial pressure are now becoming apparent as households struggle with the highest inflation rate seen in nearly three years.
Consumer spending constitutes approximately 70% of the U.S. economic activity. This reality raises concerns about a potential economic slowdown if Americans curtail their spending, especially with the ongoing surge in energy prices.
“If gas prices remain high, middle-income families will likely have to make more difficult choices. For the majority of households, gas is not a discretionary expense; it’s essential for commuting to work, managing family needs, and daily life,” stated Glenn Williams, CEO of Primerica, a financial products provider.
Inflation disproportionately affects low- and middle-income households. This is because they allocate a larger portion of their income to essential goods such as gasoline and food.
It is important to note that consumer spending is still on an upward trajectory, and U.S. households, in general, maintain a stable financial position. Bolstered by strong corporate profits, the stock market has also achieved a series of record highs, benefiting investors.
However, with the nation’s GDP expanding at a modest annual pace of 1.6% in the first quarter, some experts are warning that consumers might soon exhaust their capacity to spend. The following points highlight some of the concerns keeping economists awake at night.
Income Growth Failing to Keep Pace with Inflation
Two crucial inflation indicators—the Consumer Price Index (CPI) and the Personal Consumption Expenditures (PCE) price index—reveal that the incomes of many Americans are not keeping pace with inflation. This means that millions of households are experiencing a decline in their purchasing power as consumer prices rise faster than their incomes.
“After accounting for inflation, household income has decreased by over 1% in the past year—a drop typically associated with a recession,” commented Gus Faucher, chief economist at PNC, regarding the latest PCE data.
He further elaborated, “Excluding the pandemic period and the fluctuations caused by tax rate changes in 2013, this represents the most significant year-over-year decline in real after-tax income since the Great Recession in 2009.”
Rising Credit Card Delinquencies
According to recent data from the Federal Reserve Bank of New York, credit card delinquencies across the United States have reached their highest point since 2011, a period when the economy was still recovering from the Great Recession.
Economists interpret this increase in missed payments as a sign that a growing number of consumers are finding it difficult to meet their financial obligations. Data released this month by the bank indicates that approximately 13% of all credit card accounts nationwide were in arrears during the first quarter.
Savings Rate Drops to a 22-Year Low
The personal savings rate declined to 2.6% last month from 3.6% in March, as indicated by the April PCE report released on Thursday. Heather Long, chief economist at Navy Federal Credit Union, stated that this marks the lowest savings rate for Americans in two decades.
“A year ago, the savings rate stood at 5.5%. It has now fallen to 2.6%. While larger tax refunds are providing some temporary relief, these will be depleted by July. A period of belt-tightening is unavoidable later this year,” she noted in an email.
Increased 401(k) Loans and Hardship Withdrawals
Fidelity reports that an increasing number of Americans are taking out loans and initiating hardship withdrawals from their 401(k) accounts.
In the first quarter, 19.2% of Fidelity accounts had outstanding loans, an increase from 18.8% in the previous year. Hardship withdrawals, which are typically made to address critical financial emergencies such as medical expenses or to prevent eviction, rose to 2.5% in the first quarter from 2.3% a year earlier.
Reduced Gas Purchases
Recent research from the New York Fed suggests that this year’s surge in gasoline prices is affecting households differently based on their income levels.
The researchers found that lower- and middle-income households reduced their gasoline consumption in March, coinciding with the initial rise in fuel prices due to the Iran war. This occurred even as their overall spending increased. In contrast, high-income households showed minimal changes in their driving habits.
“Our data indicates that 80% of individuals expect gas prices to increase in the coming months, and many households are responding by postponing significant purchases, delaying vehicle maintenance, or reducing their savings,” said Primerica’s Williams.
Some retailers are observing similar signs of financial strain. Walmart reported that its customers purchased less fuel per fill-up during the first quarter.
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“The average number of gallons customers purchase at our fuel stations has fallen below 10 for the first time since 2022,” stated Walmart Chief Financial Officer John David Rainey during a call with Wall Street analysts earlier this month. “This is an indicator of financial stress.”
