Are Consumers Holding Back or Just Calming Down?

Source: Thinkstock

Source: Thinkstock

This June, consumers stayed home. According to Gallup’s consumer spending survey — a timely indicator of discretionary spending in the United States — daily spending averaged $91 for the month, pulling back from $98 in May.

Not surprisingly, consumer confidence as measured by Gallup’s U.S Economic Confidence Index in June hit its lowest since December last year. According to the survey, about one in five Americans (22 percent) said the economy is “excellent” or “good,” while 34 percent said it is “poor.” Consumers’ overall economic outlook remained bleak as 38 percent said that the economy is improving while 58 percent said it was getting worse.

According to Gallup’s self-reported consumer spending survey, the drop in daily spending among all Americans was led by contraction in daily spending among the richer Americans. Americans living in households with $90,000 a year or more in income spent an average of $157 a day in June, down sharply from $189 a day in May. On the other hand, reported spending among middle- and lower-income Americans (households with incomes of less than $90,000 a year) was steady in June. Spending among this group has been roughly the same each month since January. The reduction in spending by upper class Americans could be due to increased savings. Going by economic theory, when incomes rise beyond a critical threshold, consumers tend to start saving larger portions of their income. This is especially true when inflation is expected to rise in the near future.

Gallup’s survey includes basics such as gas purchases at the pump and impulse purchases online or in stores to gauge patterns in discretionary spending, but it does not include routine spending, or consumer’s monthly bills, and big-ticket items like homes or cars.

Inflation, on the other hand, is showing signs of firming up. The Commerce Department’s report showed that inflation was inching closer to the Federal Reserve’s goal of 2 percent. The price index for personal consumption expenditures tracked by the Fed rose 0.2 percent in May from the prior month and was up 1.8 percent from a year earlier. That was the biggest 12-month increase since October 2012.

Inflation is the general level of prices of goods and services in the economy. Demand or consumer spending driven inflation can be good for the economy to some extent as spending is most often linked to wage increase. An economy that is moving towards full employment tends to have a higher demand driven inflation.

If data emerging from labor markets is anything to go by, consumer optimism about the economy may start reflecting in the spending numbers in the second half of the year as more jobs get added to the economy. The economy added 288,000 jobs in June, according to the Employment Situation report. Clearly, more jobs would imply higher spending and greater demand would drive economic activity.

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