Why are Americans spending so much?

Americans have been pessimistic about the economy for years. Weirdly, that’s seemed to have little impact on their willingness to open their wallets.

Retail sales surged during the pandemic as home-bound workers clicked “complete purchase” on everything from Pelotons to sourdough starter. In 2020, e-commerce sales rose by 43 percent. Stimulus checks gave Americans newfound savings and excess money to burn. Supply chains couldn’t keep up with the demand.

That was all supposed to come crashing down at some point. For more than a year, economists warned about the “death of the consumer” and a resulting recession — neither of which have materialized. Consumers were expected to retreat as inflation skyrocketed, hitting a 9.1 percent peak in June 2022 and remaining stubbornly above the Federal Reserve’s target rate of 2 percent.

Instead, Americans just kept buying more, even accounting for price increases and beyond growth in their disposable income. Their spending helped drive US economic growth in 2023 and remained high in the first months of this year. In March, consumer spending increased by 0.8 percent, exceeding expectations from financial analysts.

There is a sign that Americans’ shopping spree might be finally coming to an end: Retail spending stayed the same in April as compared to the previous month, falling short of analyst projections for growth.

However, those numbers don’t capture spending on services — for example, health care, transportation, and insurance — which has increased markedly this year. And both Preston Caldwell, a senior US economist at Morningstar, and Scott Hoyt, a Moody’s Analytics economist, said those numbers could easily bounce back next month, even if they’re expecting spending to cool by the end of the year.

“I am anticipating that we do see eventually a consumer slowdown over the course of this year,” Caldwell said. “It’s premature to say that that’s already playing out right now.”

Indeed, spending is bound to come down at some point under the pressure of high interest rates, which the Fed isn’t expected to cut until later this year — or potentially at all in 2024. So why, despite all the doom and gloom among consumers, has spending been so resilient?

Who is driving high spending?

Two things are simultaneously true: People feel really negatively about the economy, and that’s not stopping them from spending. In May, the University of Michigan recorded its lowest consumer sentiment reading in six months — an index of 67.4 out of 100 — as part of its long-running survey.

That’s up from this time last year, but still well below pre-pandemic consumer sentiment readings, which hovered in the upper 80s and 90s. The trend in sentiment was widespread across demographic lines: Consumers “expressed worries that inflation, unemployment and interest rates may all be moving in an unfavorable direction in the year ahead,” the University of Michigan report reads.

It’s hard to reconcile that with high spending figures. But in short, the rich currently feel rich and account for a large share of overall spending. The middle class feels a little better off too, and likely still has some savings built up they can burn through. They might not yet have felt the pressure of high interest rates and inflation to the same degree as people who rent and have fewer investments. (But that’s due to change.)

High-income consumers — households in the top 20 percent of income earning at least $244,025 before taxes as of 2022 — have been largely cushioned from economic headwinds and are flush with cash to spend.

The pandemic saw Americans’ average percentage of income saved increase to an all-time high of 32 percent in April 2020 after many households received stimulus checks. That has helped fuel spending, but unlike in other high-income countries where consumers have proved more thrifty, Americans are close to depleting those savings.

“The excess savings [are] still kind of sloshing their way through the system. Depending on how you estimate excess savings, they will be depleted sometime in the middle of 2024 or maybe by as late as mid-2025,” Caldwell said.

Many high-income consumers also locked in low interest rates on their mortgages before the Federal Reserve started raising rates in March 2022, and they’re seeing their home values continue to go up nonetheless. The average US home price increased from $287,000 in 2019 to $450,000 in 2024. This is in part due to persistent low inventory: High interest rates have kept would-be sellers on the sidelines because their mortgage payments would be higher if they bought a new place.

High-income consumers have also seen their investment portfolios balloon in the last year. The stock market repeatedly tested new highs in recent months, with the latest record set on Thursday in the wake of new data showing that inflation is slowing. And wealthy older Americans who allocate more of their portfolios to government bonds are benefiting from higher interest rates.

“That sort of gives consumers an incentive to spend out of their newfound wealth,” Hoyt said. “And since this set of consumers still has excess savings left over from the pandemic, that gives them the easy, relatively liquid monies to do so.”

The question is how long the stock market can sustain this run. Some analysts think stocks are currently overpriced and due for a correction — which might cause some people to finally close their wallets.

“Equity prices are starting to move more into arguably overvalued territory,” Caldwell said. “So that’s probably not going to be a tailwind [for spending] over the next year.”

At the same time, the factors currently fueling spending at the highest income levels aren’t universal. Not all consumers can afford to spend more.

Even though inflation has come down significantly from its 2022 peak, low-income Americans are struggling with higher prices. Consumers in general say they are budgeting more on everyday essentials like fresh produce and baby supplies.

Among people living paycheck to paycheck, pandemic savings (if they ever really had any) might be long gone.

Low and moderate-income consumers are also increasingly weighed down by credit card debt and struggling to pay it down due to high interest rates, which research suggests could be a major contributor to overall economic pessimism.

Though credit card debt levels dipped during the pandemic, they are now returning to pre-pandemic levels, with the average balance per consumer increasing by 8.5 percent in the last year to $6,218. More than half of people earning less than $25,000 carry a balance on their credit cards.

Their only consolation is that the job market remains strong, meaning they might be able to count on another paycheck — but even that might not last. Analysts including Caldwell expect the unemployment rate to rise from 3.8 percent to 3.9 percent and wage growth to slow in 2024.

Ultimately, however, low-income consumers “just don’t account for that big of a share of total spending,” Hoyt said. “It’s the high end of the income distribution that accounts for a disproportionate share of the spending.”