Consumer spending rose a healthy 0.6% in September after growing 1% in August, the Bureau of Economic Analysis reported Friday. But the report came with some red flags: Large, durable goods purchases (think cars and appliances) were down 0.2%, while spending on other, nondurable items surged 0.9% — mostly because food and gas prices are on the rise.
That suggests consumers are willing to keep spending, even while prices increase. But they could be holding back on some bigger-ticket items.
The good news is the Delta variant seems to be on the downslide, at least for now. Consumers could start venturing out again toward the end of the year if the trend continues. And automakers are reporting some easing of the supply chain crisis that has seriously crunched inventory — which could help car prices come down a bit and lead to some robust end-of-year purchases, perhaps some luxury cars with bows on their tops for holiday gifts.
If we’re in for a December to remember, though, consumers are going to have to keep dealing with higher prices.
A merry Christmas for stores
“As the Delta wave recedes, consumer spending is turning higher, with the latest data showing increased hotel occupancy and restaurant visits,” said BMO senior economist Sal Guatieri.
People are returning to work, and pay keeps rising along with inflation. They’ve built up savings over the pandemic, too, which will give shoppers and stores a tailwind going into the holidays, according to Guatieri.
“Holiday sales look to be very strong this year…if stores can find enough workers to deliver them,” he said.
Retail sales in November and December are expected grow between 8.5% and 10.5% this year compared with the 2020 holiday season, to a record of up to $859 billion, the National Retail Federation, a trade group for retailers, said Wednesday. The figure excludes car dealers, gas stations and restaurants.
Both companies reported revenue results on Thursday that fell short of Wall Street analysts’ expectations and warned that supply chain issues could weigh on business in the December quarter.
Shipping delays means those supply and demand scales will continue to be in imbalance. As your Econ 101 professor told you, that means prices will keep rising, right through the end of the year.
Higher prices ‘well received by customers’
Yet companies are also confident that, with supply tight and demand red hot, they have pricing power over customers and can pass along the soaring costs they’re facing to customers.
“Consumers are paying higher prices because there are limited opportunities to purchase other goods,” said Gus Faucher, chief economist at PNC. “If your dishwasher breaks and you need a new one, and dishwashers are in short supply, you’re willing to pay a premium. Same with household products like cleaners, toothpaste, or toys. That’s allowing businesses to raise prices.”
“We have not seen a material change in customer behavior. And I think it speaks to the strength of the customer,” Albertsons CEO Vivek Sankaran said on an earnings call earlier this month. “We don’t see their intent changing dramatically over the next several weeks and months.”
“If inflation persists at a high level and that is stronger than wage growth, that would cause consumers to be more cautious with their spending,” said PNC’s Faucher. “They have to eat out less and go to the movies less. Instead of buying steak, they’re going to buy ground beef.”