What is due to the wave of ‘unrestrained consumption’ in the USA that confuses economists – 12/17/2023 – Market

Consumers in the US are spending money at record levels. Economists view the phenomenon with surprise and strive to predict where it will end.

In a context of high interest rates, meager savings and crippling inflation, Americans are consuming unrestrainedly.

On Black Friday, in-store sales increased 1.1% compared to last year; On the internet alone, a record value of US$9.8 billion (R$48.6 billion) was reached.

On Cyber ​​Monday, consumers spent another US$12.4 billion (R$61.5 billion), an impressive increase of 9.6% compared to last year.

The two dates reflect the spending pattern of Americans, which kept the country’s economy growing last year, representing almost 70% of the 4.9% growth in real GDP in the third quarter.

While some of the spending reflects the rising cost of basic necessities, Americans continue to buy big-ticket items and spend a lot of money on experiences like travel.

This “YOLO” stance towards money contradicts consumer trends in previous economic crises.

Some economists have wondered about the phenomenon, especially as consumers’ perception of the economy remains overwhelmingly pessimistic.

“If we had said 18 months ago that the US Federal Reserve could raise interest rates by 500 basis points and that the consumer would remain relatively calm, I would have been very surprised,” says Ellie Henderson, economist at Investec bank.

“I would have said, ‘That’s not how the economy works.'”

So how is this phenomenon explained? These are some of the keys to understanding the consumer fever in the USA.

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Typically, after a major crisis or recession in the job market, the economy typically experiences a small recovery in both consumer savings and spending.

However, the Reserve Bank of San Francisco reported in May that the post-pandemic rise in fiscal spending this year has outpaced the growth that has followed any other recession since the 1970s.

Much of this growth, experts point out, is due to an “unprecedented” increase in savings accumulated by American families, driven by the US government’s rapid fiscal response to the pandemic.

Stimulus packages that directly injected $5 billion into the US economy—combined with other indirect policies that included eviction moratoriums or suspension of student loan debt payments—led Americans to save about US$2.3 billion (R$11.4 billion) in 2020 and 2021.

Although people have withdrawn some of their savings this year, many still have money in reserve — some for the first time in their lives — and are willing to spend it now, even if they don’t believe there will be a full economic recovery.

This sustained period of “You only live once” spending amid rising debt and dwindling savings has confused many economists.

New priorities

The younger and upper-middle class segments of the North American population lead this type of spending, according to the Boston Consulting Group.

Although these people are not necessarily wealthy, they earn enough to cover their needs and can spend on leisure travel and luxury items.

Many also lean toward “buy now, pay later” platforms, which are seeing huge growth in the U.S., as occurred during November’s Black Friday shopping spree.

“The strength of consumer spending, even after the dark days of the pandemic, took me by surprise,” says Wendy Edelberg, senior fellow in economic studies at Brookings and director of the Hamilton Project.

However, although this pattern does not follow the country’s economic precedents, some experts argue that it may be intuitive behavior.

“When you don’t really know what the future holds—or even if there’s a long enough future for you—you focus on the present and the short-term horizon,” says Chiraag Mittal, associate professor of marketing at the University of California’s School of Marketing. Commerce McIntire of the University of Virginia.

And he adds that, amid behavioral changes in work and life, “people are choosing to prioritize their happiness and fun.”

Malcolm Harris, author of “Palo Alto: A History of California, Capitalism, and the World“a book about Silicon Valley without translation into Portuguese, says that these types of intangible factors are often left aside in qualitative analyzes that try to explain macroeconomic trends.

“Working life can change qualitatively without being well captured by metrics,” he says.

Although many people continue to work and receive wages, they are not necessarily happy: for example, wages are not keeping up with inflation and people are still recovering from the physical and psychological trauma of the pandemic.

“While the job satisfaction numbers look solid, life happiness indicators are at rock bottom,” explains Harris.

“Given that so much of our lives are related to work, how can analysts square this circle?” he asks.

The perception of temporality

As inexplicable as the phenomenon may seem, many economists agree that these “Yolo” spending patterns cannot continue forever and that the economic landscape is about to change.

Henderson warns of significant headwinds that could affect this situation, such as the impact of early education grants that expired last October and the return of student loan payments.

“How will this not affect consumption in the future?” says the economist.

Furthermore, US credit card debt has surpassed US$1 billion for the first time and economists predict that the cost of basic goods is not likely to fall anytime soon, even if inflation is controlled.

Henderson predicts it’s a matter of time before some Americans are forced to tighten their belts and limit waste.

But after such an exceptional fiscal year, Edelberg isn’t so sure.

“I really don’t know when that’s going to change,” she says.

If he had to take a risk, Edelberg says that the change in behavior will happen by the end of the year. Still, she says, “I honestly wouldn’t be surprised to be surprised.”

This text was originally published here