Delta variant and high prices cannot keep the US consumer down

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American consumers have in recent weeks been hit by rising prices and a resurgent virus. But thanks to hefty fiscal stimulus and steady employment growth, that has not stopped them from spending.

Consumption by US households drove a 6.5 per cent annualised increase in the country’s gross domestic product growth in the second quarter, showing a healthy rebound during the month of June, according to data released by the commerce department late last week. The composition of spending has been shifting from goods to services, but the overall eagerness of shoppers to use their cash has been unquestionable.

“Part of the reason the economy has been so resilient following such a large shock is the extraordinary ability and willingness of the consumer to spend,” said Michelle Meyer, head of US economics at Bank of America. “The overall fundamentals are still strong, and there will be more engagement that will happen in the fall as people return to the office and go back to school.”

So far, economists and officials are not rushing to downgrade their forecasts for the US economy based on the spread of the Delta variant, even though it has brought more risks to the outlook.

Jay Powell, the Federal Reserve chair, suggested at a press conference last week that there was less of a relationship now between the state of the pandemic and the economic picture than there had been in the past and that individuals and business seemed more capable of adapting.

“With successive waves of Covid over the past year and some months now, there has tended to be less in the way of economic implications from each wave,” Powell said. “We don’t have a strong sense of how that might work out, so we’ll just be monitoring it carefully.”

Aneta Markowska, chief financial economist at Jefferies, said “household finances were in their best shape in decades”, citing strong income statements and an enormous stock of accumulated savings, which she estimated was $2.4tn, with about half of that sitting in cash and checking deposits.

Durable goods spending has contracted for a third straight month, but the most recent pullback was driven in large part by a 7.7 per cent decline in car sales, as scarcity and surprisingly high prices turned buyers away. Elsewhere spending has been strong — and the personal savings rate, which reached 26.9 per cent in March, has moved down to 9.4 per cent.

“The last round of stimulus was above and beyond,” Markowska said. “We didn’t just make up for lost income due to the pandemic, it more than replaced it.”

Business spending was also rebounding faster than expected, though it still lagged the surge in consumer spending, Sachin Mehra, Mastercard chief financial officer, said in an interview.

“What we are seeing is people are feeling more and more the need to get out and go and see the customers, go and see their suppliers, engage with their business partners, and that’s being manifested in terms of how they’re exercising their commercial spend.”

That trend held true for small business, midsized companies and large multinationals, helping the payments group report this past week a 36 per cent leap in quarterly revenue.

So far small businesses were leading the charge, according to Mastercard rival American Express. Spending across small-to-medium businesses in the US rebounded to 73 per cent of pre-pandemic levels in the most recent quarter, while corporate clients charged less than a quarter of what they spent on Amex cards over the same period in 2019.

“What’s interesting is small businesses, even now, are travelling more than the large businesses,” said Jeff Campbell, chief financial officer, adding that the trend was unlikely to reverse by the end of the year.

“It’s the large businesses where you really don’t see any signs of life right now, and we’re not counting on any.”

However, both companies are optimistic that corporate travel will make a comeback, particularly as their own employees start booking flights. Mastercard has already resumed in-person meetings with clients, which Mehra expected would have a ripple effect across the industry.

“The fear of missing out is going to set in,” Mehra said.

So far, there is little evidence that higher inflation is putting a big damper on spending, either on the personal or the business side. While inflation expectations had risen to 4.7 per cent for next year, according to the University of Michigan’s consumer sentiment survey, they are expected to fall back to 2.8 per cent over the 5-10 year horizon, signalling that most Americans do not believe in a dangerous spiral and are fairly unruffled by recent data.

“People recognise prices are going up, but they have the ammunition to do things still,” said James Knightley, chief international economist at ING. “They may not be happy to spend $9 on a beer, but they are going to do it because they haven’t done it for so long.”