A pedestrian carries shopping bags in the Herald Square neighborhood of New York, U.S., on Wednesday, April 13, 2022.
Calla Kesler | Bloomberg | Getty Images
Sandy Magny plans to take her teenage daughter to West Palm Beach, Florida this summer, even as airfares go up.
It won’t be cheap, but Magny doesn’t want to miss visiting his family. The 40-year-old paralegal, who lives in the Bronx and works in Manhattan’s Financial District, discovers there are other things she can live without.
“I bring more lunch,” she said. “I could make coffee at the office.”
Magny is one of millions of people beginning to change direction after two years of the Covid-19 pandemic. Consumer prices have risen at the fastest rate in four decades. The cost of everything from housing to lattes is rising, raising questions: when and where will consumers cut spending?
Some companies are already feeling the impact as they try to pass on higher costs to customers.
Amazon’s most recent quarterly sales grew at the slowest pace since the dot-com meltdown in 2001. Netflix lost subscribers last quarter for the first time in more than a decade. Video game maker Activision Blizzard, appliance giant Whirlpool and 1-800-Flowers all posted weaker sales last quarter.
Meanwhile, companies from Ford to McDonald’s to Kraft Heinz and United Airlines reported resilient demand as consumers continued to spend despite rising prices.
Changes in consumer behavior are worrying some executives.
“We think the consumer is going to spend,” Macy’s chief financial officer Adrian Mitchell said at JP Morgan’s Retail Round-Up last month. “But are they going to spend on discretionary items that we sell, or are they going to spend on a plane ticket to Florida, or to travel, or to eat out more?”
Coca-Cola CEO James Quincey told CNBC last week that customers “won’t swallow endless inflation.”
Consumer spending, as measured by the Commerce Department, rose 1.1% in March, after adjusting for seasonal variations. And spending remains strong even among low-income households with annual incomes below $50,000, according to data from Bank of America. (Data excludes households that do not have access to cards.)
But consumer confidence, a measure of shoppers’ feelings about market conditions reported by the Conference Board, fell in April.
“We don’t really see a lot of signs of a slowdown, despite the concerns that are happening in the market,” said Anna Zhou, US economist for Bank of America.
One reason is the amount of money people have put aside during the pandemic. On average, low-income households have $3,000 in their savings and checking accounts, nearly double what they had at the start of 2019, according to internal Bank of America data. It gave consumers a buffer, even if they paid more at the gas pump and at the grocery store, Zhou said.
Only the good things
Many customers aren’t just spending, but are increasingly willing to splurge, whether it’s on a high-end pair of Levi’s jeans or a first-class seat on a Delta Air Lines flight.
Apple on Thursday reported a “record level of upgrades” in the first three months of the year as users upgraded to its more premium iPhones, but warned of the impact of lockdowns in China. And as automakers hike prices to reflect tight inventories from global supply chain issues, car seekers aren’t scared off.
Ford Chief Financial Officer John Lawler said this week that despite price increases, the company is still seeing exceptionally strong demand for its new products, ranging from the small Maverick pickup, which starts at around $20,000, to the electric crossover Mustang Mach-E, which in higher versions. can cost upwards of $60,000. It’s already sold out for the 2022 model year.
United, Delta and Southwest Airlines forecast 2022 profits on seemingly insatiable customer demand after two years of a brutal pandemic for both leisure and business travel. Their own personnel constraints further prevent them from flying.
Round-trip U.S. domestic airfare for travel between Memorial Day and Labor Day averaged $526, up more than 21% from 2019, Airlines data shows. Reporting Corp. travel agencies.
“The demand environment is the strongest in my 30 years in the industry,” United Airlines CEO Scott Kirby said in an April 20 earnings release.
Travelers walk through Terminal A at Orlando International Airport on Christmas Day, Saturday, December 25, 2021.
Stephen M. Dowell | Orlando Sentinel | Getty Images
Levi Strauss & Co. Chairman and CEO Chip Bergh told CNBC last month that despite rising prices, consumers weren’t turning to cheaper denim. Levi reaffirmed its outlook for fiscal 2022, which calls for revenue growth of between 11% and 13% over the prior year.
But there are signs that consumer appetite may be nearing its limit.
U.S. domestic airline bookings in the first two weeks of April fell 2% from the previous two weeks, the first decline in such a period this year, according to Adobe Analytics. In March, bookings were up 12% from 2019, but customer spending on those tickets was up 28%.
Restaurant traffic in March fell 1.7%, according to industry tracker Black Box Intelligence. High-end fine-dining, casual and family restaurants saw the biggest surge in sales growth, but the segments are still trying to recover from pandemic lows.
Jodi Klobus, a 58-year-old mother of three and grandmother of four who lives outside of Albany, NY, told CNBC that she and her husband, a retired New York police officer York, used to dine at the restaurant twice a week. Now that their meals, and everything else, are more expensive, they’ve gone back to twice a month.
“I feel it in the wallet,” Klobus said.
Challenges ahead in 2023
And there are other looming risks that could dampen consumer spending, although the impact is not immediate. Rents are rising and property taxes have not fully caught up with soaring home values.
The Federal Reserve aims to fight inflation by raising interest rates. This translates into higher borrowing costs for homebuyers and credit card users.
In the fourth quarter, U.S. credit card balances rose $52 billion, the biggest quarterly jump in 22 years of New York Fed data, but they’re still down $71 billion from the end of 2019.
Credit card delinquency rates in the United States rose to 1.62% from a more than three-decade low of 1.48% in the second quarter of last year, still far from the peak of 6 .6% reached in the first quarter of 2009, the end of the Great Recession, according to the St. Louis Fed.
“For this year, consumer spending should remain resilient,” said Zhou, the economist at Bank of America. “For next year it’s a little less certain – and certainly towards the second half of next year, that’s when the risk of a bigger downturn in consumption may arise. “
Boeing CEO Dave Calhoun said Wednesday airline demand for new planes is picking up thanks to a resurgence in travel demand. Still, it’s unclear whether Americans will continue to splurge on travel in the coming months or reach a point where they cut back.
“That second year, when inflation starts to weigh on consumers’ pockets, that’s when those numbers really start to matter to us,” Calhoun said in an interview with “Squawk on the Street.” from CNBC.
For now, many consumers, like Cindy Maher, a 58-year-old woman who owns a leadership development consulting firm and lives in Bloomfield, Connecticut, feel comfortable enough to maintain their spending habits.
“I don’t cut back,” she said. “I’m just complaining about the prices.”
Maher said she noticed nearly $7 loaves of bread and it cost $70 to fill her car’s gas tank. But she said that in her two-income household, she could absorb those costs.
“My heart goes out to those in low paying jobs,” she said.
–CNBC Amelie Lucas and John Rosevear contributed to this article.