Click on graphs to view full screen.

To understand the current juxtaposition of price inflation in the midst of slowing, but positive, GDP growth and historically low unemployment numbers, it helps to understand where these discrepancies originated and how our everyday personal expenses impact the overall economy.

Consumer spending or Personal Consumption Expenditures (PCE) make up 70% of our economy, so what Americans are spending their money on is extremely important to the direction of the economy.

This consumption includes all purchases made by consumers, such as food, housing, energy, clothing, health, leisure, education, communication, transportation, travel, and dining out. It is estimated that the national average amount spent is somewhere around $60k/year or just over $5k each month. The vast majority of that gets spent on five things: housing, transportation, food, utilities and taxes.

Traditionally, unemployment moves inversely with PCE as shown in the chart above.

In 2023, we should see reigned-in spending as unemployment rises due to measures aimed at reducing inflation. But why is spending still so high when inflation is so high?

Right now, consumers have approximately $930 billion in excess savings; that is the amount saved above the normal, pre-pandemic savings rate. This savings was accumulated during the pandemic through stimulus money and sheltering in place. As of October 2022, consumers had spent only 25% of these excess savings.1

This balance-sheet excess has enabled consumers to spend at an elevated rate even as the Federal Reserve tries to squeeze demand out of the economy—exacerbating the need for a more severe and longer-lasting rate hiking cycle. However, inflation continues to take a bite out of purchasing power, shrinking the effect of all those extra dollars in peoples’ wallets. Consumers have a cushion, but that cushion won’t last forever. Estimates show that this excess savings will last until roughly the second half of 2023. As these excess savings run out, inflation will subside not only in the personal consumption retail market, but also across commodities heavily utilized in the construction industry.

Source: 1) federalreserve.gov

No data was found
No data was found