Americans reluctant to spend as inflation woes continue – Forbes Advisor

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Inflation has been hitting American consumers since 2021, but relief is finally coming, especially at the gas pump.

After spending ten weeks below the 50 mark, the main confidence index of the latest Forbes Advisor-Ipsos Consumer Confidence survey is up 2.5 points to 52.1.

The surge in consumer optimism was helped by President Joe Biden’s student loan relief plan, the Cut Inflation Act and still strong employment numbers.

But the good news comes with an important caveat: our latest survey also revealed that consumers are tightening their budgets.

Nearly 35% of people said they were spending less than usual, a jump of 6 points from this time last month and the highest percentage since November 2021.

Survey shows job confidence is fragile

As the Labor Department reported record layoffs in July, headlines paint a grim picture. Companies like Ford, Peloton and Redfin are all cutting jobs, which could signal a tough road ahead.

Given these mixed signals, it’s no surprise that survey respondents are evenly split when it comes to jobs. Half said they were more confident about job security for themselves and their families than they were six months ago, an increase of 5 points from a year ago two weeks.

  • 23% said they, a family member or a personal acquaintance had lost their job in the past six months due to economic conditions, down 1 point from two weeks ago.
  • 40% said they or a family member or personal acquaintance are likely to lose their job in the next six months due to economic conditions, up 3 points from a year ago at two weeks.

“Labour markets are starting to show weakness, and I think they will continue to deteriorate in the fourth quarter of 2022 as retailers report weaker earnings and earnings,” said Shmuel Shayowitz, president of Approved Funding.

Consumers are saving more and repaying their debts

Shopping tends to slow during recessions, especially for big-ticket items, as consumers turn to thrift.

Some observers say the US economy is already in recession as economic data showed GDP shrank in the first two quarters of 2022.

Americans may already be cutting spending in anticipation of bad financial winds. Everything from Netflix subscriptions to home buying activity has weakened.

The Forbes Advisor-Ipsos survey found that consumers are actually restricting their spending. Some 35% of respondents said they were spending less money than usual, up from 29% last month.

There was a slight increase in the number of people who report borrowing money or using credit more than usual – 18% this month, compared to 17% last month. As interest rates rise, so does the cost of your credit card balances.

“Cash is king in an economic downturn. Although you have ample borrowing power on your credit card, it’s one of the first things to do as banks reduce risk to approaching a recession,” says Peter Donisanu, chief financial strategist at Franklin Madison Advisors in Pittsburgh. “That’s why if you don’t have enough money to cover at least three to six months of sustenance, it may be time to top up your emergency fund.”

There is a slight increase in the number of people saving more than usual: 12% compared to 10% a month ago. And 13% of respondents say they are spending more than usual on their loans and credit card debt. These are both smart money moves in a recession, says David Kass, clinical professor of finance at the University of Maryland’s Robert H. Smith School of Business.

“Consumers under these conditions should consider paying off consumer debt and delaying major purchases,” he adds.

More Fed rate hikes won’t help confidence

The next Federal Reserve meeting is fast approaching and consumers may be worried about the impact of another rate hike on the economy.

Most experts expect the Fed to make its fifth straight rate hike. Although the peak of inflation is near, the Fed is still struggling with stubbornly high prices.

Kass expects three more outsized rate hikes in September, November and December, totaling between 100 and 125 basis points. The current federal funds rate is 2.25% to 2.5% and the Fed expects it to reach 3.1% to 3.6% by the end of the year.

“These rate hikes will increase consumers’ borrowing costs, for example for home and auto loans,” Kass said. “Furthermore, the fear of job loss as the economy slows will cause consumers to save more and spend less.”

Survey methodology: Ipsos, which surveyed 924 respondents online Aug. 22-23, provided the results exclusively to Forbes Advisor. The survey is conducted every two weeks to track consumer sentiment over time, using a series of 11 questions to determine whether consumers have a positive or negative view of the current state of the economy and its future development.