Five Ways Americans Keep Proving Economists Wrong

Mon Oct 30 2023
Eric Whitman (320 articles)
Five Ways Americans Keep Proving Economists Wrong

Americans’ prolonged spending spree has confounded economists and resulted in a surging U.S. economy. What’s keeping their feet off the brakes?

A strong labor market, resilient savings stockpiles and rising values of their homes have consumers feeling good and willing to spend. Despite complaints about high prices, they are taking their children to concerts, packing movie theaters, booking luxury vacations, buying cars and covering the costs of rent and dinners out.

Strong spending caused economists to be wrong about a 2023 recession, though they still predict cutbacks ahead.

There are signs that Americans’ elevated spending habits aren’t sustainable. Some 60% of Americans said they have fallen behind on emergency savings this year, according to a Bankrate survey. In September, they saved 3.4% of their income, about half the rate they saved in the fall of 2019, the Commerce Department said. And long-term interest rates—which make it more expensive to buy homes and cars and to borrow money—may only now be reaching the point where they will slow Americans’ roll.

Nevertheless, many of the factors that have driven the 2023 spending binge remain intact. Here’s a look at why people are keeping their wallets open for now.

Americans are feeling rightfully confident about their job prospects and paychecks.

Cody McLaughlin is reaping the benefits of doubling his salary over the past three years to roughly $130,000. His decision to stay at the digital advertising company he had been with for four years, when many of his colleagues were leaving, resulted in two raises and permission to move to Alaska as long as he lived an hour from an airport.

“When so many people quit at the same time, I actually saw an increase in my value to the company,” McLaughlin said.

The move helped him connect better with clients, who are eager to hear about his hunting and fishing expeditions. And it inspired him to start a sideline producing wilderness podcasts, netting him about $50,000 a year.

The extra income enabled McLaughlin, 30 years old, to purchase two homes in the area and a new car. He has also spent thousands exploring Alaska.

“I feel horrible every time someone says the word ‘pandemic,’ because financially speaking, it was the best thing that ever happened to me,” McLaughlin said.

His employment experience reflects the job market’s momentum. Employers are adding to payrolls at a healthy pace, and unemployment remains near historic lows. Job openings exceeded the number of unemployed Americans seeking work by more than three million in August. Wage growth was a solid 4.2% in September, outpacing 3.7% inflation, which has cooled since mid-2022 but remains above prepandemic levels.

“The strength of the labor market and the strength of household balance sheets has helped Americans weather some of that storm” of inflation, said Daniel Zhao, an economist at the jobs website Glassdoor.

The cost of financing a home has marched higher since 2021, putting the average 30-year fixed mortgage near 8% and keeping many would-be buyers on the sidelines. Plenty of Americans who locked in low mortgage rates, though, have extra cash.

Since the pandemic’s onset through the second quarter of 2023, Americans collectively pocketed about $280 billion from tapping the equity in their homes and saved about $120 billion from refinancings, according to researchers at the Federal Reserve Bank of New York.

Jessika and Dylan Amaral bought their 1,400-square-foot starter home in 2019 thinking that they would have moved by now.

They are still there. After refinancing their 30-year, 4.13% mortgage down to a 20-year one at 2.7%, they have realized they are stuck with the deal they’ve got. “Yeah, we’ll get our house sold, but the process to get something new will be so much more difficult and the rate will be gone,” said 31-year-old Dylan Amaral, who works in higher education.

Meanwhile, the couple’s household income roughly doubled through a combination of job changes and promotions. The Amarals are now turning their 1910s home into one that suits them long term.

They took out a $20,000 home-equity loan to fund some improvements so they could put more of their paychecks toward their retirement accounts and stock portfolios.

“We’re investing in this house and making it something we’re really happy in, because this idea that in five years we’re going to be able to move is not really an option anymore,” said Jessika Amaral, 31.

Roughly 90% of mortgaged homes have a rate below 6%, according to calculations from Mark Fleming, chief economist at First American Financial Corp. About two-thirds of American households own their home, according to the Census Bureau.

“Many people locked in [lower rates] and then inflation takes off, but it only affects half their budget,” Fleming said. “Homeowners essentially have this great hedge against inflation.”

The pandemic gave Americans the opportunity to stockpile savings, and many are still benefiting from that cushion.

Alex and Amanda Ward, with three children under 6 when the pandemic hit, were among the millions of Americans eligible for the federal government’s huge stimulus payments.

With a combined household income below $150,000 as public-school teachers, the Wards qualified for every round of pandemic stimulus-relief checks, receiving nearly $14,000. They also netted $10,200 through expanded child tax-credit payments in 2021.

With daycare closed for their two youngest children, the Wards saved an additional $8,000 over four months. They also sold for six figures a condo that they had purchased a decade ago and rented out.

Overall, Americans accumulated more than $2 trillion in savings above the prepandemic trend by August 2021, according to estimates from the Federal Reserve Bank of San Francisco. Recent estimates of the remaining excess pandemic savings range from $190 billion from the San Francisco Fed to between $400 billion and $1.3 trillion from economists at RSM.

Alex Ward, a 37-year-old economics teacher, was able to invest in nonretirement index funds and individual stocks. The Wards built up an emergency fund for the first time and contributed to college funds.

They are headed to Cancún, Mexico, for the second time in two years and paid a health coach $200 a month as part of a goal to increase their fitness and longevity.

While it is hard to pinpoint exactly how long Americans will hold on to the excess savings, many economists say those funds are part of why consumers have continued to spend freely.

Pandemic-era savings also went to paying down debt, said Jonathan Parker, a professor of finance at MIT Sloan. That gives consumers room to borrow, even if they have burned through some of the extra savings, he said, adding that, “People have a fair bit of debt capacity before they start hitting constraints.”

During the second quarter of this year, Americans’ credit-card balances rose 4.6% from the prior quarter, topping $1 trillion in total, according to the New York Fed.

Prices for many items are rising more slowly than they were a year ago. But consumers remain fixated on how much lower they were before the pandemic, a mindset that may be driving some people to buy a car or fix their home while they can still afford it.

When Blagica Bottigliero’s dishwasher started acting up earlier this month, the 47-year-old beverage events business co-owner quickly headed to a local appliance dealer to buy a replacement. Though inflation has slowed, she said that she and her husband have adopted a “buy now” approach after watching price increases erode their purchasing power.

The couple has become diligent about stocking up on groceries when they see a sale, and recently bought a stand-up freezer. They scheduled a roof replacement on their home for spring 2024, locking in October’s rates for a year with a $500 down payment, even though the roof isn’t leaking yet.

“I want to set it and forget it before things get really bad economically,” Blagica Bottigliero said of her fears of a coming slowdown.

Surveys of consumers indicate that Americans worry about the economic outlook and the possibility of a recession.

Michael Liersch, who oversees a team of advisers as head of advice at Wells Fargo, said this future-oriented mindset could be fueling some of the recent spate of spending. “People feel like their money is losing value so rapidly that they want to use it now,” he said.

The experience economy continues to boom, with Delta Air Lines reporting a record 30% jump in earnings in the quarter ended in September and Ticketmaster selling more than 295 million event tickets in the first six months of 2023, up nearly 18% year over year.

Amanda Miller Littlejohn, 42, radically changed her approach to spending after finding what turned out to be a benign mass in her breast and watching people her age die during the pandemic.

“I sincerely felt my mortality in a way I never have before,” said Littlejohn, adding that she had treated her three children to fun, and never herself.

This year, she went on a blowout birthday trip to Paris, splurging on a $728-a-night hotel stay and a $313 tasting-menu dinner she called the most expensive meal she had ever eaten. She also shopped at designer stores on Avenue Montaigne.

Even after her executive-coaching business took off in 2021, she still continued to approach spending with caution. This past year marked a turning point. She took on fewer clients, lowering her salary to have more time to enjoy what she earns.

“I want to be more than just a person who works all day for clients and comes home and works all night for the children, and I don’t really do anything for me,” Littlejohn said.

Eric Whitman

Eric Whitman

Eric Whitman is our Senior Correspondent who has been reporting on Stock Market for last 5+ years. He handles news for UK and Europe. He is based in London