Americans watch their spending as they burn through pandemic savings

Americans are burning through the excess savings they amassed earlier in the coronavirus pandemic, fuelling concern among a growing number of companies about the outlook for consumer spending once the one-off boost to the economy ends.

In this fourth-quarter earnings season several consumer-facing companies have hailed the resilience of an economy where wages are rising, unemployment remains at record lows and Americans are spending on experiences they missed early in the pandemic. Demand is booming for premium vodkas, customised Starbucks orders and Disney theme park tickets, executives report.

Others, though, have warned of a new caution among shoppers. Lower-income customers in particular are cutting back on purchases from cat litter to mattresses as inflation keeps prices high and as they spend money they had saved thanks to stimulus packages and lower spending after Covid-19 hit.

Estimates of these savings vary but Morgan Stanley analysts calculated last month that US households spent roughly 30 per cent of their $2.7tn in pandemic “excess savings” in 2022. This cushion had disappeared completely for many poorer consumers, they added.

“In general, families at the lower end of the income spectrum don’t have any more excess savings and if anything they’re dipping into their savings,” said Gregory Daco, chief economist at EY-Parthenon. There is now a “K-shaped” pattern in consumer spending, he said.

“The well-offs are the ones who still have the ability to spend relatively freely but even so they are doing so with more caution” given inflation and high interest rates, he said. “It’s the lower and medium end of the income spectrum that are persistently struggling in the face of these high prices.” 

That split is leading to mixed messages from executives, even as companies across sectors become more wary of predicting the outlook for the coming months.

Citing how many Americans had used up their excess savings, Tyson Foods chief executive Donnie King told analysts this week that he expected its consumers to be under more pressure over the rest of this year. Mattel noted that higher-priced toys had been affected by “macroeconomic challenges”, with sales of its American Girl dolls down 16 per cent.

At the same time, Hilton Worldwide chief executive Chris Nassetta highlighted the $1tn-plus of excess savings consumers were still sitting on as a boost to the hotel sector.

“They are spending it, and they’re probably reading the papers and watching the news and getting more nervous,” he said, but hotel operators were benefiting from a parallel shift in spending from goods to experiences such as travel.

“The confusion in some of these headlines speaks to the fact that the economy is moving at multiple speeds, depending on the sector of the economy,” said Michelle Meyer, North America chief economist at the Mastercard Economics Institute.

“We’re in an environment where the economy is right-sizing and depending on the sector of the economy that’s going to feel different. For some sectors it’s going to be a nice acceleration, but for others it’s a contraction,” she said.

Mastercard’s SpendingPulse tracker found that US retail sales excluding automotive were up 8.8 per cent year-over-year in January, but the headline number masked big differences between sectors. Sales of furniture and furnishings fell 1.2 per cent even as people’s travel budgets rose and restaurant spending soared by 24.2 per cent.

With household balance sheets generally “in pretty solid shape”, consumers “have money but they’re nervous”, Hugh Johnston, chief financial officer of PepsiCo, told the Financial Times. They were avoiding large purchases, “but they do want an affordable treat”, he said.

Several companies drew a distinction between wealthier and poorer customers, with Diageo hailing the growing market for premium spirits priced at $50 or more per bottle and Yum Brands highlighting growing interest in cheaper menu items such as Taco Bell’s $2 burritos.

“We’re seeing the high-end consumer continuing to hang in there [but] the low-end consumer has been where a lot of the deterioration has been,” Scott Thompson, CEO of mattress maker Tempur Sealy International, told analysts.

Pet owners were trading down from premium to “value” litter, Church & Dwight told investors. “I don’t know if technically, we’re in a recession or not as judged by economists, but I can tell you our consumer sure feels that we’re in a recession,” said Barry Bruno, its chief marketing officer. As inflation pushed up the cost of everyday goods “that’s forcing them to make difficult decisions”.

A University of Michigan survey confirmed on Friday that high prices were still weighing on consumers even as inflation moderated, keeping sentiment 22 per cent below the index’s historical average.

Daniel Sullivan, chief financial officer of Edgewell, said the maker of razors and sun cream had seen no trading down but would not be surprised if pricing in its markets became more promotional. “We do see the data, particularly the recent spike in credit card usage, and that’s usually a pretty good indicator,” he noted.

The more cautious consumer picture has played into a corporate reporting season when earnings are coming in on average just 1.6 per cent above expectations, according to Refinitiv I/B/E/S. Over the past 30 years large listed US companies have beaten forecasts by 4.1 per cent on average, making this “surprise factor” the weakest since the crisis-hit fourth quarter of 2008.