Bank of America’s CEO, Brian Moynihan, revealed a cautious spending outlook among U.S individuals and businesses due to anxiety over rising inflation and interest rates. This attitude could potentially dampen the country’s economic growth.
Further factors feeding this hesitance include uncertainties around the worldwide COVID-19 situation and its broader economic impact, and particular concerns around the supply chain. Surveys indicate prevalent unease among Americans about the economic future.
Consumer expenditure this year experienced a moderate growth of 3.5%, totalling approximately $4 trillion; a significant deceleration from last year’s near 10% growth rate. Despite this slowdown, sectors such as online retail and home improvements remain resilient.
However, sectors dependent on person-to-person interactions, such as the travel and entertainment industries, have seen steep declines. This demonstrates the ongoing influence of the pandemic on consumer behavior, as people prioritize essential goods and services.
Increased financial prudence in the face of economic uncertainties could also account for this conservative expenditure. Many are choosing to save rather than splurge on non-essential expenses.
In the future, it is anticipated that consumer spending will increase marginally, primarily due to the economy gradually reopening and vaccine programs being rolled out. Yet, this recovery is expected to be cautious, largely hinging on the pandemic’s course.
A decrease in consumer card payments, check transactions, and ATM cash withdrawals underscores this slowdown in spending.
Inflation’s impact on consumer expenditure slowdown
This could negatively affect critical sectors like retail and services, inhibiting commerce flow. The downward trend in cash withdrawals could mean a shift towards digital transactions or reduced cash use due to economic uncertainties.
Previously experiencing a period of “exceptionally low growth” between 2016 and 2018, Moynihan suggests this contraction in expenditure began last summer. This navigation through economic changes has been stressful for consumers and businesses alike, with weakening purchasing power due to rising prices and businesses reassessing financial strategies in light of higher loan interest rates.
Increased lending costs put significant strain on small businesses struggling to find affordable credit opportunities. This cost surge also impacts the housing market by making mortgages or home refinancing pricier.
Inflation pressures and heightened borrowing costs are impacting the overall economy, not just isolated sectors. The Federal Reserve seeks to balance slowing inflation and promoting economic growth with its decision to increase rates. Although this can strain businesses and consumers immediately, it’s a technique to maintain long-term economic stability by controlling inflation. Thus, both consumers and business are encouraged to monitor market changes and plan finances diligently.
A majority of finance professionals and economists believe the Federal Reserve’s approach to be balanced, promoting inflation control without hampering economic growth. This strategy has contributed to record-breaking stock market success this year.
