Credit Sesame discusses the worrying trend that Americans expect their spending to grow faster than income.
Despite high inflation, high interest rates, and high debt burdens, consumer spending continues to increase. You might expect this trifecta of financial woes to encourage consumers to tighten their belts. However, Americans continue to spend beyond their means. Recent survey data shows that elevated spending is the norm, and consumers expect to continue to overspend over the coming year.
Increased spending may eventually force many households to make difficult financial choices. For the economy as a whole, current overspending might hamper future growth.
Consumers expect their spending to grow faster than income
The June 2024 Survey of Consumer Expectations from the Federal Reserve Bank of New York offers some insight into the financial plans of American households. One thing stands out: Americans expect their spending to grow faster than their incomes.
Income growth and spending have different peaks and valleys, but they should be somewhat in sync over time. After all, the money households spend has to come from somewhere. However, since the pandemic, Americans have gotten used to increasing spending much faster than their incomes have grown.
The Survey of Consumer Expectations asks consumers how much they expect their household incomes and spending to change in the year ahead. During the five years up to the end of December 2020, these numbers tracked fairly closely—households expected spending to grow 0.54% faster than household income.
Since the beginning of 2021, households have expected spending to grow 2.55% faster than household income.
Inflation is not to blame
Inflation is a natural scapegoat for explaining how this state of affairs has arisen. But in this case, inflation is not to blame. Two years ago, when year-over-year inflation peaked at 9.0%, rising prices were a leading reason consumer spending rose faster than income growth. Inflation has since moderated, and wages are growing faster than prices. Prices rose by 3.0% over the twelve months through June 2024. Average weekly earnings grew by 3.6% over the same period.
The New York Fed survey found that consumers expect wage growth and inflation to be more or less in sync going forward. Over the next year, consumers expect both to be around 3%. However, consumers expect household spending to rise by 5.1% over the next year. In short, they plan for their spending to grow faster than inflation and their incomes.
Diminished savings or added debt?
Spending can temporarily rise faster than income without causing much harm, but in the long run it’s not sustainable. If spending growth continues to outpace income growth, many consumers will find themselves facing two unattractive alternatives: either they must draw down their savings or go into debt.
The New York Fed’s Household Debt and Credit figures show that many families have already incurred or increased their debt. Total household debt is up 20.78% over the past three years, led by credit card debt, which has risen 44.81%.
The especially rapid growth of credit card debt suggests that much of this borrowing is for short-term spending rather than long-term projects. Credit card debt is the most expensive type of debt and can quickly spiral, making it very difficult to pay off.
Families that spend savings instead of going into debt diminish their financial resources for the future and detract from future economic growth.
The (somewhat) good news: consumers can be wrong
Expectations can shape reality, especially if inflation nudges them. The good news is that the Survey of Consumer Expectations measures consumer intentions regarding what people think will happen in the future. The Fed and expert economists are often wrong about their predictions, and consumers may also have gotten it wrong.
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Disclaimer: The article and information provided here are for informational purposes only and are not intended as a substitute for professional advice.
