Turbocharged U.S. Consumer Plays Key Role in Supply-Chain Snarls

(Bloomberg) -- Amid all the hand-wringing over global supply-chain snarls and how they’re fanning inflation, little attention in the U.S. is being paid to the demand side of the economy.

That’s despite mounting evidence that the American consumer’s supercharged spending habits are playing at least as big of a role in stoking higher prices as the bottlenecks of imported goods in West Coast ports.

Households have amassed more than $2 trillion in excess savings during the coronavirus crisis -- thanks to the lockdowns during which spending was curtailed, the unprecedented stimulus money from the government and the boom in equities and housing values. At the same time, as shown in a government report Friday, the labor market is strengthening, with hiring and wages rising.

The buying-spree fueled by all these forces is generally a positive for the economy, underpinning the recovery from last year’s recession. But too much of a good thing can become a problem as strained suppliers get overwhelmed by the surge of orders, and react by jacking up prices.

In a sign of just how strong this demand boom is, consumers continue to scoop up products at a breakneck clip even after prices have been marked up. Data compiled by Bank of America Corp. show card spending was up about 20% from 2019 last month; consumer confidence rose in October for the first time in four months as the delta variant started to retreat, and analysts anticipate record sales for Apple Inc. and Amazon.com Inc. this quarter.

In addition, high earners are poised to ramp up travel and leisure activities that have been on hold for more than 18 months -- further fueling a consumption binge.

“You will have the sort of the overhang of demand that is likely to extend into the next year,” said Elina Ribakova, deputy chief economist at the Institute of International Finance. “We have savings mostly in the upper side of the income distribution and these are the people that are most interested in spending right now.”

‘Release Valve’

Consumers’ resilience toward higher prices could also mean that high inflation will prove more persistent than Federal Reserve Chairman Jerome Powell has anticipated. 

“This really was a demand shock more than a supply shock,” said Rebecca Patterson at Bridgewater Associates on Bloomberg TV on Oct. 27. “Supply can’t keep up, and the release valve, if you will, will be higher wages, higher inflation.”

Powell acknowledged at a press conference Wednesday that “very strong demand” is causing bottlenecks and shortages that are leading to price hikes -- but reiterated his expectation for inflation to eventually come down as supply constraints ease.

The nation’s urge to splurge has made it an outlier among major economies during the pandemic. As Nomura Holdings Inc. economist Rob Subbaraman put it in a recent note: “Excess demand in the U.S. dwarfs that of the euro area.”

The strength of consumer spending, which contributes about 70% of the U.S.’s gross domestic product, is good news for the world’s largest economy.

But nationwide data are masking inequalities that are bound to widen in the next months: The expected holiday spending bonanza by people with means will likely overshadow the hardship of lower-income households and the unemployed, who are feeling the pinch from a fading of government support and higher prices at the gasoline pump and supermarkets. 

Card-spending data aggregated by Bank of America point to an acceleration in outlays by richer households, who account for a larger share in travel and services. Meanwhile, among families that make less than $50,000 annually, former recipients of emergency unemployment benefits reduced spending meaningfully after the program was phased out in early September, Bank of America economists wrote in an Oct. 21 note.

The latest University of Michigan consumer sentiment survey echoed the dichotomy. One in five households spontaneously mentioned declining living standards due to inflation, concentrated among poorer families and older generations who have searing memories of soaring gas and food prices in the 1970s.

Watching Shelves

In big cities like New York where life is expensive anyway and few people drive cars, some young residents say the threat of rising prices hasn’t made a dent in shopping behaviors. 

“Until it’s really noticeable on shelves, I don’t think people will scale back,” said Danielle Smith, a 32-year-old hairdresser in Brooklyn. 

But Nikki Dunn, a 36-year-old financial planner in Austin, Texas, said she and her husband are putting off getting new vehicles because of the higher prices. However, she’s not considering inflation when it comes to gifts.

Retailers big and small are gearing up for a gangbuster shopping season, urging consumers to start early. Best Buy Co. is moving Black Friday to a week earlier than normal. Target Corp. already saw more people getting into its stores.

Bottom Lines

The National Retail Federation is positively upbeat, predicting that holiday retail sales during November and December will rise at least 8.5% to a record $843 billion. Consumers are “spending because they can,” said Jack Kleinhenz, the group’s chief economist.

To be sure, inflation will flatter the sales figures in dollar terms, and the season could be spoiled for the shoppers who will inevitably fail to get their products on time as supply-side snarls drag on. And tech giants Amazon and Apple anticipate a hit on the bottom line from rising labor costs and chip shortages, respectively.

While it’s not immediately apparent amid the disruptions and delays, overstimulating the U.S. economy has helped improve the supply side, according to James W. Paulsen, chief investment strategist at the Leuthold Group. Tight labor markets pushed companies to be more productive, and the surge of core-capital-goods orders is a sign that business leaders are investing in the future.

“By deciding to ‘run the economy hot,’ policy officials have also generated ‘supply-side soundness,’” Paulsen wrote in an Oct. 27 note.

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