Consumer spending is trending downward, a sign that the economy may be starting to cool.
- A Thursday report from the Commerce Department revealed that consumer spending declined in November even further than projected.
- Sales dropped 0.6% last month, lower than the estimated 0.3% drop the Dow Jones had predicted.
- This marks the largest drop in retail sales in a year.
- The decline was across multiple categories, including furniture, which fell by 2.5%, building materials declined by 2.5%, and auto parts dropped by 2.3%.
- Online sales also saw a decline of 0.9%. Bars, restaurants, and food and beverage stores saw a nearly 0.9% increase.
- Though spending is beginning to decline, fewer unemployment claims were filed during the same time period. Weekly claims fell by 20,000.
- Following the report, the Dow Jones Industrial Average has fallen nearly 900 points.
Why it’s news
Declining consumer spending is an indicator that the economy may be cooling, though the labor market remains strong. Manufacturing declined along with retail sales.
Despite the drop in spending, employers have retained their employees for the most part—resulting in a strong labor market.
While consumer spending fell, so did applications for unemployment benefits. New applications were at their lowest levels in a two-month period, but the amount of time individuals stay on unemployment is climbing, Bloomberg reports.
The data points to a likely slowing economy, something the Fed has been hoping to achieve since it began raising rates. So far this year, spending has continued despite rate hikes due to larger savings accounts accumulated during the pandemic. However, as savings begin to dwindle, spending will decrease.
Even with the beginning signs of a slower economy, the Fed isn’t planning to back off rate hikes any time soon. On Wednesday, Federal Reserve Chair Jerome Powell indicated that the bank will need to continue hikes. According to Powell, the labor market is still too tight, and growing wages could further spur inflation.
One of the driving factors behind inflationary growth has been continued consumer spending. The drop in spending last month is a welcome sign to the Fed as it indicates that the bank’s methods are starting to have the desired effect.
However, the drop could be influenced by early holiday shopping. Retailers offered better discounts than usual this year in order to move inventory. The ensuing holiday shopping could have skewed October’s consumer spending numbers, making the decrease from October to November look more significant.
Additionally, American consumer spending habits are shifting as consumers spend more on services rather than goods. Continued spending doesn’t appear sustainable as more Americans rely on credit cards to make purchases.