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Chart of the Month: Spending in the USA
Mon 27 Nov 2023 by Brad Olsen in RetailNewsletter

Spending activity continues to be in focus, with Black Friday sales and the looming Christmas shopping season providing some insight into household budgets. That’s true not just in New Zealand but around the world, with the trend for the US economy helping determine the pathway for interests more generally. After experiencing the US economy first hand recently, this Chart of the Month explores spending activity trends in both the US and New Zealand.

Spend that dollar dollar bill, y’all

Heading over to the US in mid-October, I was intensely curious about how household spending was going, given interest rates continued to rise to combat inflationary pressures. Yet economic activity appeared strong, with views that a recession might be avoided as economic demand remained more resilient than expected.

What became clear – in both my observations and in the US economic data – was that retail activity seems surprisingly and remarkably upbeat. Monthly retail sales data from the US shows that spending levels by October 2023 had increased 9.3% above levels seen at the start of 2022 and are now sitting 34% higher than the start of 2020 (pre-pandemic – all figures seasonally adjusted).

As Chart 1 shows, US retail spending saw a boost in March 2021, when spending levels were boosted by the additional money to distributed to households as stimulus checks (helicopter money). Remarkably, retail spending has retained that higher level even after the stimulus checks were spent.

In comparison, spending activity in New Zealand has also increased, but not by as much. October 2023 spending levels here at home were only 3.0% above spending levels at the start of 2022, and up 12% above January 2020 levels.

Perhaps the more striking trend is that, although New Zealand’s retail spending levels are plateauing and then starting to fall, spending activity in the US continues to rise.

There are a number of factors to consider here – population growth over time (and in what age groups, inflation rates (and different inflation rates for different goods), the relative importance of household consumption on the economy, etc. But there’s no mistaking the fact that US spending remains resilient in the face of a challenging set of economic circumstances.

Soft landing inbound?

The resilient spending activity in the US has been part of the reason behind expectations that the US economy might be heading for a soft, rather than hard, landing. Similar trends, albeit less strong than in the US, is also reflected in Infometrics’ October 2023 forecasts that made the same point – perhaps the slowing inflation we’re seeing, coupled with better than expected economic activity like robust enough spending, paves the way for soft landing?

Conversations with those much more ingrained in the US economy highlighted that higher interest rates have been influencing economic and social activity in a different way. In New Zealand, shorter-term mortgage rates (ranging usually from one- to five-year rates), means that household budgets have to adjust within a short enough timeframe, as mortgage repayments cost more and other spending is de-prioritised.

In the US, with longer mortgage rate terms (often 30 years), the impact of higher interest rates are felt in different ways. Although some people will always have to sell their house or move around due to live circumstances changing, many in the US were able to re-fix their mortgage at a low rate for 30 years, and are unwilling (obviously) to move house and require a new mortgage rate on a different house – at a rate much higher than they originally had. As a result, US house sales remain low and social mobility has reduced, as people who previously would have moved house and area for changing job opportunities, find themselves locked in to the current low mortgage rates they can’t afford to move from.

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