The continued strength of consumer spending reflects the resilience of the U.S. economy after a year and a half of disruptions, and the success of the government’s economic response in insulating many families from the damage.
Written by Ben Casselman, Sapna Maheshwari and Coral Murphy Marcos
American consumers are dour about the economy, worried about inflation and pessimistic about the direction of the country in general.
But none of that is keeping them from spending.
Retail sales set a record in October, before adjusting for inflation, as shoppers splurged on electronics and home improvement projects. Major retailers such as Walmart are posting strong profits. And Wall Street forecasters are predicting a holiday season that looks less like pandemic-constrained 2020 than like 2019, when a strong labor market powered robust sales.
The continued strength of consumer spending reflects the resilience of the U.S. economy after a year and a half of disruptions, and the success of the government’s economic response in insulating many families from the damage. Households in the aggregate have trillions of dollars more in accumulated savings than before the crisis.
But the heavy spending, particularly on goods rather than services, is also contributing to the economy’s problems, intensifying supply-chain snarls and shipping delays. That, in turn, is pushing up prices: Inflation in October hit its highest annual rate in more than three decades.
“It’s the demand in the first place that’s causing prices to move higher,” said Aneta Markowska, chief financial economist for Jefferies, an investment bank. “There is a supply shortage, but it’s not because of bottlenecks. It’s because we’ve had this big shock to aggregate demand, and supply can’t respond quickly enough.”
Those issues are doing little to dampen the fortunes of the country’s largest retailers, including Walmart and Home Depot, both of which reported quarterly earnings Tuesday that topped Wall Street’s expectations.
Walmart in recent months began chartering ships to circumvent the shipping congestion and has been pushing to hire 150,000 workers before the holidays. On Tuesday, the company said its inventory in the United States was 11.5% higher heading into the holiday season this year than last.
“The holiday season is here, and we are ready,” Walmart CEO Doug McMillon said on a call with analysts.
Consumers overall spent a record $638 million at stores and restaurants in October, the Commerce Department said Tuesday, up 1.7% from September and 21% above prepandemic levels. It was the biggest one-month gain since March, when the final round of government stimulus checks lifted spending.
Inflation is eating up some of the increased spending. Sales at gasoline stations rose nearly 47% in October from a year earlier, the result of gas prices that are up roughly the same amount in that time. But overall, sales are rising faster than prices: Adjusted for inflation, retail sales were up 0.7% percent in October from the previous month, and up 9.5% from a year earlier.
Krizzia Soto-Villanueva in Burlington, Vermont, said she had been engaging in “retail therapy,” or shopping to make herself feel happier, after she realized she spent the last 18 months at home without spending much on herself. After she started a doctorate program at the University of Vermont and became a resident assistant in September, she decided to use her paycheck in the coming months to make up for what she didn’t spend before, buying clothes and hiking equipment.
“I’m aware prices are going up, but I spent almost two years without spending money on myself,” Soto-Villanueva said. “I’m not going to spend all of my savings, but if I really want something, I’m not going to hesitate much.”
Despite her free spending, Soto-Villanueva said she was “feeling a little pessimistic about the economy,” in part because she’s paying more for rent and utilities. She isn’t alone: The University of Michigan last week said that consumer sentiment fell sharply in early November and was lower than when the coronavirus outbreak was at its worst. The drop partly reflects partisan patterns — Republicans soured on the economy when President Joe Biden took office — but even Democrats report being concerned about rising prices.
The increase in inflation is partly a result of pandemic-induced shifts in how consumers are spending their money. Spending on goods — from groceries to cars to home-gym equipment — soared last year as people spent more time at home. That put extra pressure on supply chains already under stress from shutdowns at ports and factories around the world, leading to both product shortages and higher prices.
Economists, including policymakers at the Federal Reserve, expected spending on goods to fall as the pandemic eased. So far, that hasn’t happened. The retail sales data showed growth in both online and in-person spending.
“Everybody believed during 2021 that we’d see a significant shift away from goods back to services as the economic environment opened up as we got our arms around the pandemic,” Home Depot CEO Craig Menear told analysts after the company reported its earnings Tuesday. “Clearly, we have not seen that.”
Strong October sales may partly reflect an early start to the holiday shopping season. In mid-September, L.L. Bean added a banner to its website warning customers about holiday shipping delays and shortages and urging early shopping. Best Buy offered its Black Friday deals well before Halloween, from Oct. 19 to Oct. 22. Target started “early Black Friday” deals on Oct. 31.
“I’m sure some folks started looking earlier because of worries that they won’t be able to find the item they’re looking for once everybody gets out to shop,” said Beth Ann Bovino, chief U.S. economist at S&P Global.
There are some signs, however, that shortages are beginning to ease, in part because retailers, too, shopped early this year. At the Port of Los Angeles, holiday orders usually begin arriving in late August or early September; this year, they began arriving in June, Gene Seroka, executive director of the port, said at an event Tuesday with Transportation Secretary Pete Buttigieg.
Economists warned that if consumers simply got a head start on holiday spending, that could lead to disappointing sales in November and December. But most forecasters expect spending to remain strong because of the improved public health picture and the underlying strength of the U.S. economy.
Unemployment has fallen to 4.6%, from close to 20% at the height of the pandemic, and wages are rising, particularly for low-income workers. Households are sitting on a collective $2.5 trillion in savings built up during the pandemic — and, unlike last Christmas, when the pandemic reduced the appeal of browsing, fitting rooms and lingering indoors, many Americans feel comfortable going out and spending.
Tom Nolan, CEO of Kendra Scott, a fashion jewelry business with 119 locations, said its sales were up “materially” over both last year and 2019 and that he expected the performance to continue through the end of the year.
“People have money to spend, they’re excited to be back out in the world again, they’re excited to be back with their families this holiday season,” Nolan said.
Spending on services — particularly in-person, discretionary services like travel, live performances and exercise class — slumped last year and has rebounded only gradually. The spread of the delta variant of the coronavirus has slowed the service-sector rebound: Restaurant sales were flat in October and have been mostly stagnant since July.
“The thing that’s still missing is discretionary services,” said Ian Shepherdson, chief economist for Pantheon Macroeconomics, a forecasting firm.
But barring a new spike in coronavirus cases, Shepherdson said, spending on services will rebound as Americans resume holiday travel. People may say they are pessimistic in surveys, he added, but their spending sends a different message.
“There’s going to be plenty of money lying around, and I think spending is going to be very strong,” he said.
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