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3 Things Spending Tells Us About the Economy [VIDEO] Thumbnail

3 Things Spending Tells Us About the Economy [VIDEO]

The U.S. consumer plays an important role in the economy, accounting for almost two-thirds of U.S. gross domestic product (GDP). For this reason, economists pay close attention to the aggregate financial health of consumers.

Purchasing activity can be tracked by the Johnson Redbook Index, which measures the percentage change in sales at stores open for at least a year (including online sales). The dataset is a proxy for consumer spending and includes about 9,000 department, discount, and chain stores.

The chart below shows retail spending generally increased over the last two decades, with notable exceptions in the early 2000s (Tech Bubble), 2008 (Global Financial Crisis), and 2020 (Covid-19 Pandemic):Chart - Johnson Redbook Retail Sales Index

Looking at the last few years shows the dip in spending at the onset of the Pandemic (2020) was followed by a spending spree fueled by stimulus checks, increased wages, and pent-up demand (2021).  Retails sales have trended lower since July 2022

The decline in retail sales highlights 3 key themes

First, the U.S. economy is returning to its pre-pandemic trend, with job growth slowing, manufacturing activity softening, and home sales declining.

Second, inflation pressures are easing after inflation (CPI) peaked at a 40-year high of 9% in June 2022. Since the Johnson Redbook Index isn't adjusted for inflation, its 2021 growth and subsequent 2022 decline track inflation’s rise and fall.

Third, consumer spending is shifting from goods to services, such as travel, concerts, and dining out, as consumers make up for previously missed opportunities. The Johnson Redbook Index’s focus on retailers means that it omits spending on services, further emphasizing the slowdown in spending on goods.

Consumer spending remains resilient

With a modest year-over-year decline of -0.2%, consumer spending remains resilient even amid higher interest rates and recession concerns. However, the decline adds to concerns about consumer strength.

Recent data from the New York Fed showed that outstanding credit card balances reached a record high of $1 trillion in Q2 2023, signaling an increased reliance on credit cards. Additionally, personal savings accumulated during the pandemic are gradually shrinking. 

With the prospect of higher interest rates for longer and hopes for a Fed orchestrated "soft landing", retails sales will be an important indicator to watch.

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