American shoppers just keep on spending, lending vital support to the economy. The question is: How long will it last?
What’s happening: Americans appear to be indulging in a healthy dose of retail therapy despite stubbornly high inflation and the possibility of a recession ahead.
Preliminary Black Friday and Cyber Monday numbers point to a strong holiday season, despite earlier concerns that it could turn out to be weak.
A record 197 million Americans did some holiday shopping between Thanksgiving and Cyber Monday, according to a survey by the National Retail Federation. That’s a 10% increase from last year. Shoppers spent an average of about $325 on holiday-related purchases over the weekend, higher than last year’s $301. The group predicts that overall holiday sales will rise by between 6% and 8%. While that would be slower growth than last year, it’s above historical averages.
Shoppers also set a new record on the biggest online shopping day of the year. They spent a total of $11.3 billion on Cyber Monday, representing 5.8% growth year-over-year, according to Adobe Analytics.
The continued strength of the US consumer is nearly single-handedly staving off recession in the US, Bank of America CEO Brian Moynihan told CNN on Tuesday. Americans are still employed, they still have money in their bank accounts and they’re still spending that money, he said.
Consumer spending is a major driver of the economy, and the last two months of the year can account for about 20% of total retail sales — even more for some retailers, according to NRF.
The Federal Reserve said in a report last month that US households still have a nice chunk of their pandemic savings left. They still have access to $1.7 trillion, about 75% of the total cash that households collected and saved during the pandemic. That reserve is steadily shrinking. But there’s still enough left to support strong consumption… for now.
“At the end of the day, the consumer has held in well, and at the end of the day the consumer stays responsibly strong,” said Moynihan.
A double-edged sword: Resilient consumers are typically a good thing. But when the Federal Reserve is actively trying to squash high inflation rates, they risk becoming a fly in the ointment.
“Consumers’ spending is more or less unfazed not only by high inflation, but also the rate hikes intended to get prices under control,” economists at Wells Fargo wrote.
The high rate of spending could agitate investors in this good-news-is-bad-news economy because it adds to inflationary pressures. That means the Fed may use the strong data to keep hiking interest rates.
A slowdown in consumer spending could lead to recession and short-term economic pain, but some economists say that’s still a better outcome than the long-term pain entrenched inflation could bring.
Paying the check: While American bank accounts are still fairly robust, they’re beginning to dwindle. In the third quarter of 2022, credit card balances jumped 15% year-over-year. That’s the largest annual jump since the New York Fed began keeping track of the data in 2004.
US consumer confidence fell in November to its lowest levels since July. That’s the second month in a row that the headline number has fallen.
“Intentions to purchase homes, automobiles, and big-ticket appliances all cooled. The combination of inflation and interest rate hikes will continue to pose challenges to confidence and economic growth into early 2023,” said Lynn Franco, the Conference Board’s senior director of economic indicators, in a statement.
Economists take this to mean that spending can’t stay this strong for much longer. At some point, the pandemic-era savings levy will break, said Chris Rupkey, chief economist of FwdBonds LLC, in a note on Tuesday. “That will take the wind out of the consumers’ sails in a hurry,” he said.
Housing: A mixed bag
Home prices fell in September from August. That marks the first time prices have declined for three consecutive months in about four years.
The S&P CoreLogic Case-Shiller National Home Price Index, which measures home prices in America’s largest 20 cities, fell 1% in September from August. It’s dropped by 2.6% over the past three months.
But buying a home isn’t getting any easier. Even as the real estate market has cooled in the face of skyrocketing mortgage rates this year, home prices are still climbing, with prices up 12.2% in the third quarter compared to a year ago, according to the Federal Housing Finance Agency.
Prices are still so elevated that mortgage giants Fannie Mae and Freddie Mac will raise the limits of government-backed loans to a record level for 2023, with the maximum loan limit hitting more than $1 million for high-cost areas, the FHFA announced Tuesday.
Mortgage rates have skyrocketed this year due to the Federal Reserve’s series of aggressive interest rate hikes. That has made it difficult — if not impossible — for many younger Americans to buy a first home.
Regional differences: Drops in overall prices don’t reflect the broader housing market, said Bill Adams, Chief Economist for Comerica Bank. That’s because certain regions have outsized impacts on the direction of the index.
“The tech industry’s correction is having an outsize impact on house prices and valuations in the Bay Area and Pacific Northwest, but price declines in the rest of the country are less severe,” he said. “Surging mortgage rates and high prices have led to a big pullback in home construction and sales, but aside from the big pullback in tech-centric metros, national house prices have so far seen only modest decreases.”
In the Case-Shiller release, the largest monthly declines were in San Francisco, down 2.2%, and in Phoenix and Las Vegas, both down 2.1%. Prices in Los Angeles fell 1.7% on the month. Price increases were generally smaller in the Midwest and on the East Coast.
Bitcoin winter claims its latest casualty
Bitfront, a crypto exchange backed by Japanese social media app Line, is shutting down after failing to overcome turmoil in the industry, reports my colleague Diksha Madhok.
The announcement by the US-based exchange comes at a time when the market for digital assets is grappling with financial contagion unleashed by the spectacular collapse of another crypto exchange, FTX.
Trading on Bitfront will be suspended by the end of the year and withdrawals on March 31, 2023, it said in a statement on its website Monday.
The company said it had been unable “to overcome the challenges in this rapidly-evolving industry,” while distancing its decision from the implosion of FTX.
“Please note that this decision… is unrelated to recent issues related to certain exchanges that have been accused of misconduct,” it added.
Prices of digital currencies have plummeted. Bitcoin, the world’s biggest cryptocurrency, has fallen about 65% so far this year. It was trading at about $16,785 on Wednesday, according to CoinDesk.
