If you want to understand how researchers and policymakers are thinking about the economy, you’d want to look at things like price indices, GDP figures and monthly jobs reports.
You would also want to look at consumer spending habits, which in many ways reflect how everyday people are thinking about their own economic futures.If people are optimistic, they may buy more. If they’re worried, they may buy less.
But how do we make sense of consumer spending when there’s no one clear trend?
Telis Demos is Heard on the Street columnist and co-host of the Wall Street Journal’s Take on the Week – and he’s been trying to make sense of how Americans are spending. He joined Texas Standard for some analysis. Listen to the interview above or read the transcript below.
This transcript has been edited lightly for clarity:
Texas Standard: In your recent piece for the Journal, you write “there are conflicting signals coming from the country’s largest credit card lenders.” What’s conflicting?
Telis Demos: Some of the big credit card companies, and I’m talking about some of the big banks that offer credit cards to people – that’s JP Morgan Chase, Bank of America, and also some of the big kind of independent credit card companies that are also banks, like Capital One, American Express, Synchrony Financial…
Sometimes you can draw a straight line through what all of them say about their business, which is all of them are showing a big uptick in spending, or all of them are showing a slowdown or even decrease in spending. That’s when you know everything in the economy is also pulling in one direction.
This time, you’re getting a bit of a mix and not just across those lenders, but also within those lenders, talking about how some of their customers are buying more and some of them are buying less. So it’s been difficult to say, just as difficult as it’s to sort of say what’s happening in the U.S. economy right now.
It’s also been difficult to say how the consumer is reacting. There hasn’t been one clear answer.
I guess if we dig into those spending habits though, do we have an idea of where people are cutting back or is that also really mixed?
Yeah, so if you draw a line, if you connect all the dots, you do get a couple of different stories emerging from that.
So across a lot of the credit card companies, especially those with kind of travel rewards cards and things like that – think of your American Expresses, your Capital Ones – they talked about how they were seeing a decline in spending on travel. They were seeing the decline in billings for people spending on airlines. They were seeing a drop in travel and entertainment spending, on airfare, whereas other economic data was showing that people were buying more.
People were actually kind of buying, taking out more car loans. Maybe they think cars are definitely going to go up in price. And there was some evidence that people are also buying more kinds of big-ticket imported items. Think of like you’re buying in a refrigerator a big flat screen TV or something like that.
So even people who do have money, what you’re seeing is a change in their spending. And so I would say that the line you draw through all that is that people are worried about both inflation and about the economy.
Well, I’m glad you brought that up, because at the start of the pandemic, inflation spiked up to more than nine percent. It’s since come down from that point. But is this something policymakers and folks watching are still concerned about?
It seems to me that in some ways, inflation has been moved to the back burner. The conversation has been about tariffs, but you’re not seeing that in consumer spending. You’re still seeing inflation being a big part of the issue.
You’re seeing the inflation numbers, like what the economic data is saying about the price level. Those have been pretty steady.
What has been really rocketing up are people’s expectations of inflation. And that is what the Federal Reserve pays really close attention to. And it’s what often drives people’s behavior. What do they think prices will be in the future?
And so that’s what you see happening, is you see people who are thinking, “you know what? I think prices are going to go up later this year. Tariffs are going to make a lot of goods more expensive. So you know what? I’m going to buy them today.”
And so it really just distorts the economic situation and forces people into buying stuff that they might not otherwise have bought today.
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Well, that’s exactly what I was going to imagine about tariffs. I’ve been sort of thinking this myself. I’m like, ah, my kids need new shoes. Do I want to buy them now? But kids’ feet grow so fast, it feels like a very unsafe bet.
It’s tough to get ahead of that one.
Yeah, so inflation and tariffs are sort of tied in this way? It’s sort of a bet that you’re making about future prices in both cases?
The evidence is that people across the country are having that conversation. But here’s the one interesting thing that I want to highlight that I think really tells another level to this story, which is that normally you would expect to see people at all budget and income levels reacting in this way.
In fact, people who make less money and have worse credit often react more strongly to the risk of inflation. And that’s not because they’ve got a bunch of extra money laying around. But that because they’re so worried about their budgets they know that they’ve got to do something today, so they’ll do whatever they have to do to kind of make sure that their costs don’t run away from them.
And the other thing is that people who borrow a lot, that actually kind of weirdly gets cheaper when inflation hits, especially those car loans, which are a fixed interest rate, because those same payments, right, if you’re paying $500 a month for your car or $300 or whatever it is, that $300 is, in a world of inflation, effectively cheaper in the future.
So actually, your spending power goes up a little bit in that regard, and so you might spend more today. And the only reason that people might not be doing that is if they’re worried about the economy and especially their jobs.
And so what some past economic research has shown is that when you see people not increasing their spending, especially people who are more kind of paycheck to paycheck, that means that they’re really worried about their economy and their jobs, and that’s actually what you’ve been seeing in some of the recent reports by the credit card companies.
