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Thursday, April 7, 2022

Consumers aren’t doing what they say they would do — and that’s a good thing for the U.S. economy and stocks, at least for now.

There’s a lingering disconnect between how consumers feel about their finances and rising inflation and how they're actually behaving, more specifically, spending.

New proprietary data from the Bank of America Institute showed that spending on the bank’s credit and debit cards rose 11% year-over-year in March, and card spending per household was up 6.7% on an annual basis. The “hard data” reflects actual purchases as opposed to planned purchases (or lack thereof). And though some of this increase may reflect rising prices, the firm suggested purchase volume was still holding up.

“Consumers are facing headwinds from higher energy and food prices, with gas prices up almost 50% from a year ago,” said David Tinsley, senior economist for the Bank of America Institute, in a statement Wednesday. “But their balance sheets appear strong enough to weather the storm, provided it doesn’t persist too long.”

The data stands in contrast with what consumers are saying. In the “soft data” — or the qualitative measures of consumer sentiment and confidence — deterioration in the face of inflation has been much more prominent.

Perhaps one of the clearest examples has been in the University of Michigan’s closely watched Surveys of Consumers index, which fell to the lowest level since 2008 in March at 59.4. The survey respondents' commentary about their financial situations was abysmal.

“When asked to explain changes in their finances in their own words, more consumers mentioned reduced living standards due to rising inflation than any other time except during the two worst recessions in the past 50 years: from March 1979 to April 1981, and from May to October 2008,” said Richard Curtin, chief economist for the Surveys of Consumers, in the March 25 release. “Moreover, 32% of all consumers expected their overall financial position to worsen in the year ahead, the highest recorded level since the surveys started in the mid-1940s.”

Likewise, the Conference Board’s U.S. Consumer Confidence Index has continued to reflect confidence levels well below pre-pandemic averages. The headline index from this survey last ticked up to 107.2 in March from 105.7 in February, but still remained markedly depressed compared to the 2019 average of about 128.

While sentiment data serves as an indicator for how consumer spending may trend in the future, the measure has little impact on the economy. Droves of people are spending even if they say they want or plan to spend less.

Gross domestic product (GDP), or the main measure of economic growth, takes into account the hard data, and at least in the U.S. is composed primarily of consumption.

And when all is said and done, some of the hard data have been more equivocal about consumption trends. For instance, U.S. retail sales (reported by the Commerce Department) slowed to a 0.3% monthly clip in February, which marked the slowest rate since a 2.7% monthly decline in December. Retail sales were still up by 17.6% compared to the same month last year, however.

Meanwhile, real personal spending (which takes into account inflation) fell by 0.4% in February, suggesting rising prices were in fact taking a bite out of the amount of purchases, and especially in goods where real spending was down by 2.1%. But real services spending rose by the most since last July, increasing 0.6%.

All things considered, many economists have continued to highlight the strength of the U.S. consumer while adding a key caveat — spending could eventually slow down.

“The public is confident enough in the outlook to keep on spending to make the economy hum even if they tell pollsters they are vexed about higher prices,” Chris Rupkey, chief economist at FWDBONDS, wrote in a note last week. “The war in Europe and stock market volatility hasn’t hurt spending yet.”

By Emily McCormick, a reporter for Yahoo Finance. Follow her on Twitter

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