American consumers remain among the biggest, and perhaps strongest spenders on essential and non-essential goods, however rising prices and sticky inflation are seeing overall optimism sink as their savings accounts are being drained and credit card debts start to pile up.
Though consumer optimism may be reaching levels last witnessed in the 1980s, broader consumer inflation continues to decline with May seeing a 0.1% decline in the consumer price index (CPI), and with year-over-year inflation ending the month at 3.3%, according to the U.S. Bureau of Labor Statistics.
While prices of goods and services may be cooling, many Americans aren’t leaving the grocery store with more in their shopping carts. In fact, many consumers now feel less positive about the current state of the economy compared to the last quarter of 2023.
Optimism Is Sinking
A recent survey published by McKinsey & Company showed that U.S. consumer optimism fell sharply during the second quarter of the year. Many are starting to feel pessimistic regarding the economy and concerned about how inflation may be eroding their purchasing power.
On top of this, many have said that their savings have taken a hard hit in recent months. The combination of having to cash out more for ordinary goods, and the weaker labor market has meant that many more Americans are now relying on their savings and emergency accounts to pay bills and cover unexpected costs.
On average 22% of consumers now feel pessimistic about the current economic state of the country. Although it is below the 24% recorded in November 2023, it’s higher compared to January this year when roughly 20% of consumers felt a sense of pessimism, according to McKinsey’s report.
However, it’s not all doom and gloom, and overall optimism remains elevated with 33% saying they are feeling optimistic, while the largest share of 45% feel somewhat mixed about the current economic environment.
The numbers tell a confusing story. On one hand, we have the Federal Reserve and policymakers saying that things are moving in the right direction, and we’re most likely to see a soft landing before the end of the year.
On the other end, the story told by consumers conveys an entirely different picture altogether. In their report, McKinsey analysts found that the majority of consumers will continue to increase their spending on essential items such as gasoline, fresh produce, pet food and supplies, and meat and dairy products in the coming months, with gasoline seeing the highest expected spending increase.
Higher prices aren’t only affecting lower-income earners, but earlier this year news headlines were flooded with six-figure earners feeling the pressure of rising prices and having to pay more for everyday goods and services.
The overall outlook is confusing, to say the least, and there is a largely contradictory behavior tugging and pulling the economy in all sorts of directions. For instance, many consumers continue to largely splurge on food, dining, and apparel, while some are also looking to cut back.
Then there are younger consumers, especially Generation Z who have instead traded down certain services or products, or where they may be buying their favorite items, and instead splurged on higher priced items compared to other consumer demographics.
Spend. Spend. Spend.
Whether it’s on new or used vehicles, medical insurance, groceries, and apparel, most of America’s consumers are spending their money on the things they feel are important to them. And while prices are higher than what they were several years ago, this isn’t stopping them from splurging on more lavish experiences such as dining out or pricey meals.
Gen Z
The youngest cohort of consumers, Generation Z is starting to enjoy the luxuries of having a full-time paycheck and quickly realizing that their financial responsibilities are beginning to pile up.
Gen Zs are reported to be the largest spenders on experiences such as dining, restaurants, and other non-discretionary items, according to the Consumer Checkpoint Report by Bank of America.
In total, Gen Zs had the highest retail spending among all generations. Overall, Gen Zs and Millennials made up roughly 32% of consumer spending in May, and although their spending habits may be different from other older groups, they are among the only generations that have seen the fastest and biggest wage growth in years.
Millennials
The second youngest generation of consumers is starting to cut back on non-discretionary spending such as retail and dining, as many of them are now entering a new stage of their life where their income might be going towards more important financial obligations.
According to Bank of America’s report, older millennials, and Gen Xers have the lowest percentage of discretionary spending, with many of them instead directing their cash towards more important necessities such as auto and student loans, paying off debt, saving for a mortgage, or paying insurance and other important bills.
Older millennials seem to be more frugal compared to their younger peers. Data shows that many older millennials are breaking even in terms of the amount of account deposits and outflows between 2020 and 2024. Younger millennials, however, are seeing more spending, and fewer deposits, with a noticeable difference between 2020 and 2024.
Gen X
Many Gen Xers are set to retire in the coming years, having already reached a peak in their careers. While some might be excited to reach the age of retirement and have the opportunity to enjoy their golden years, a lot of them are not entirely prepared, with many not having enough in savings or their retirement accounts.
A fourth-quarter survey by Schroders showed that nearly 45% of non-retired Gen Xers said to have not done any retirement planning. On average, 30% of Baby Boomers and 43% of Millennials had said the same.
Furthermore, 61% of those not yet in retirement had said that they are not entirely confident with their retirement goals compared to an overall 53% of non-retired Baby Boomers.
Not only are Gen Xers the worst at saving and planning for their retirement, but they’re also spending a lot less these days. Overall Gen X made up 27% of American households, accounting for a third of consumer spending.
Even Traditionalists are spending more. Bank of America found that Gen X was one of the only generations that saw negative spending growth in May 2024 compared to other generations.
We can’t blame Gen Xers for seeing negative spending patterns. This group is not only helping to support their kids through college, or still paying off mortgages, but many of them are financially supporting their aging parents by covering things such as their medical bills or other in-home care costs.
Baby Boomers
With many Boomers already stepping out of the workforce and into retirement, their spending habits seem to be all over the place. While many of them are frugal spenders, having either to save for their retirement or stocking cash into more important bills such as their mortgage or other debt, they account for 40% of American households and make up 36% of total consumer spending.
And where are they spending their income? Well, most of them are spending money on services, both including and excluding restaurants. These expenses can be things such as medical care, hospital visits, homeowner and auto insurance, and similar types of services.
While overall repayment rates on credit cards have started to cool in recent months, according to Bank of America, Baby Boomers are found to hold the highest percentage of credit card rate repayments.
As many of them are beginning to enter the last stretch of their careers, it’s understandable that most will be looking to get rid of as much high-interest debt as possible.
Finishing thoughts
While there’s a lot of uncertainty brewing in the economy, consumers are starting to feel the pressure, financially, cutting back on discretionary spending, and carefully choosing where they are willing to spend their money.
Overall strength in the labor market and substantial wage growth have helped to give younger generations an elevated savings ability, however much of their cash is now going towards staving off higher costs.
Older cohorts are looking to catch up with their retirement accounts, stocking more cash in their savings and putting their money towards saving for their nest egg instead of splurging on non-discretionary goods and services.
With consumers aiming to reduce their spending on certain goods and services in the coming months, it’s all up in the air over whether it’s possible for them to save a bit of money on the things they no longer need or consider a necessity.
