People Have Money but Feel Glum—What Does That Mean for Economy?

More than two-thirds of U.S. economic activity is tied to household spending. Recessions typically are accompanied by a pullback by consumers. Spending has surged during the pandemic, but it now shows signs of cooling.

Last year,

Alexandra Peña,

27, of Brooklyn, N.Y., was thinking, “Wow, we saved so much money.” She estimates she and her husband saved $21,000 between cancelled date nights and a postponed honeymoon, federal relief checks and her getting a higher-paying job. They used some of that to buy a Peloton exercise bike for their apartment.

Recently, however, inflation has shifted their perspective. Because of rising costs, she says, she has cut back on luxuries such as new clothes, manicures and haircuts, and she is trying to avoid eating out.

In February, she and her husband started looking for their first home purchase. But in recent weeks, after watching their stock portfolio sink and interest rates rise, they have put the search on hold.

“I look at my bills after going to the grocery store and wonder, ‘Who stole my credit card?’ ” Ms. Peña said.

A consumer pullback would be a big reversal if it gathers force. Spending jumped in 2021. At the end of last year, household purchases of cars, restaurant meals, clothing and other goods and services were up almost 7% from a year earlier, adjusted for inflation. This spring, between March and May, that growth rate settled to 2% from a year ago, slightly below average when compared to the previous two decades.

The hit from the pandemic proved short-lived for many. Two years since it began, household finances are remarkably strong.

At the end of March, households had $18.5 trillion socked away in deposit, savings and money-market accounts, more than $5 trillion above what they had heading into the pandemic, according to Federal Reserve data.

Cash reserves rose across income groups.

JPMorgan,

tracking 7.5 million of its own accounts, found that checking-account balances averaged nearly $1,400 among its lowest-income customers in the first quarter, up from under $900 before the pandemic. Among its highest-income accounts, balances rose to almost $7,000 from less than $5,500.

Median checking-account balance, by income quartile

Four-week rolling average for households

Median checking-account balance, by income quartile

Four-week rolling average for households

Median checking-account balance, by income quartile

Four-week rolling average for households

Median checking-account balance, by income quartile

Four-week rolling average

for households

Median checking-account balance, by income quartile

Four-week rolling average for households

Many Americans used federal relief checks to pay down debt, according to surveys by the Federal Reserve Bank of New York. Household financial obligations—including monthly rent, mortgage payments, car leases, homeowners’ insurance and other recurring bills—were 14% of their disposable income in the first quarter, according to the Fed.

That was historically low. Heading into the recessions of 1991, 2001 and 2007, that share was 17% to 18%, meaning households had less income after meeting regular payments. As unemployment rose, households cut back on spending to pay their bills.

The three- to four-percentage-point difference between then and now adds up to a lot—roughly $550 billion to $725 billion of yearly income collectively that households can save or spend.

Until stocks fell into a bear market in the second quarter, household wealth also was abundant. Net worth—assets such as homes and stocks minus debts—was eight times disposable income at the end of the first quarter, greater than 6.7 at the height of the 2000s housing boom and 6.2 during the 1990s tech bubble, according to the Fed.

“Consumer demand continues to be strong for us,”

John Lawler,

chief financial officer for

Ford

Motor Co., told analysts in June. “Our order bank is still very robust.” At 300,000, he said, the company’s order book still exceeded its ability to produce cars.

Executives at

Levi Strauss

& Co. said last week they were seeing moderation in demand for lower-end brands, though overall spending looked strong. “We really have not seen any softening or have heard really any concern about Levi’s [core brands] from our customers,” said

Charles Victor Bergh,

CEO. Revenue in the second quarter was up 15% from a year earlier; households were shifting from online shopping to shopping in stores, the company said.

Nycole and

Brady Walsh

have been doing their own calculations lately from their Austin, Texas, home.

The past decade and before weren’t easy. Nycole, 40, emerged from nursing school in 2008 with $40,000 in student loans and a national economy in deep recession. She scaled back wedding plans when her mom, who was helping fund the event, lost her job. She also sold a house at a loss.

A decade of careful budgeting, and some good fortune, left her better off. She and a new husband, 42-year-old Brady, bought another home in Austin, which doubled in value, and she paid off the student loans.

Before 2020, they made it a tradition to visit

Disney

World in Florida and Disneyland in California once each year. Then Covid put those trips on hold. The family returned to Disney World in May and booked a follow-up trip to Disneyland, where they are vacationing again.

The latest trip, however, includes modest but potentially telling changes in their behavior. With inflation soaring, they’re cutting back on how much they’ll spend on Mickey Mouse souvenirs for their two children to bring home. They’re also ordering fewer cocktails at the pool.

“As a millennial parent, I think we’re just so used to everything being hard at every juncture,” Nycole said. “If it’s not a plague then it’s a recession. Or it’s another recession. Or it’s a terrorist attack. It feels like I just expect it at this point.”

Consumer psychology is an ingredient in spending decisions, and consumers’ nerves right now look more frayed than their bank accounts.

“People really hate inflation,” said

Andrew Haughwout,

director of household and public policy research at the New York Fed.

The University of Michigan, which has been surveying households for decades about their beliefs about spending, inflation and the economy, finds consumer sentiment deeply depressed. It is at levels typically associated with recession, even though the majority of Americans say they are better off than five years ago and expect to be better off five years from now.

Its index of consumer sentiment in the second quarter was about as low as at the depths of the 2007-09 recession, when the unemployment rate hit 10%, compared to June’s 3.6% rate. The sentiment index was much lower than it was at troughs during 1991 and 2001 recessions.

It is a remarkable finding because another survey, by the Conference Board, finds the share of households who believe jobs are easy to get is near the highest in decades, thanks to historically low unemployment.

In this case, inflation, not lack of jobs, is the driving force of household malaise.

The Michigan survey shows that many households believe now is a terrible time to shop, especially for big-ticket items like cars and household appliances—worse even than the recessions of 2001 or 2007-09.

Consumer opinion on whether

jobs are easy or hard to get

Consumer opinion on

conditions for buying vehicles

Consumer opinion on whether

jobs are easy or hard to get

Consumer opinion on

conditions for buying vehicles

Consumer opinion on whether

jobs are easy or hard to get

Consumer opinion on

conditions for buying vehicles

Consumer opinion on whether

jobs are easy or hard to get

Consumer opinion on

conditions for buying vehicles

Consumer opinion on whether

jobs are easy or hard to get

Consumer opinion on

conditions for buying vehicles

“Consumers signaled strong concerns that inflation will continue to erode their incomes,” Joanne Hsu, who runs the Michigan survey, said of the latest reading. “While consumer spending has remained robust so far, the broad deterioration of sentiment may lead [consumers] to cut back on spending and thereby slow down economic growth.”

How people say they feel doesn’t always align with what they’ll do.

A survey in April by the New York Fed found that nearly a third of 1,300 respondents planned a vacation in the next four months, the highest in the survey’s seven years. Their spending plans for vehicles and furniture were stable.

“The situation is a little bit unique,” said

Wilbert van der Klaauw,

director of the New York Fed’s Center for Microeconomic Data. “There might be pent up demand for services like vacations.”

Hotel traffic has been climbing, according to STR Global, which tracks travel behavior. Stays at U.S. hotels totaled 117.5 million in June, up 8.2% from a year earlier. The Transportation Security Administration cleared 24.5 million travelers at U.S. airports between July 1 and July 11, up 10.6% from a year earlier, though still below pre-pandemic levels.

Cumulative number of travelers passing

through TSA checkpoints

Cumulative number of travelers

passing through TSA checkpoints

Cumulative number of travelers

passing through TSA checkpoints

Cumulative number of travelers passing

through TSA checkpoints

Cumulative number of travelers passing

through TSA checkpoints

Economists say the outlook for consumer spending depends heavily on whether the nation’s inflation fever recedes. Even though jobs are plentiful and unemployment very low, vast numbers of Americans find their cost of living is rising faster than the income they’re bringing home.

Not only is that discouraging, it is eating into those savings socked away during the pandemic. Adjusted for inflation, weekly worker paychecks in June were down 4.4% from a year earlier—the worst month since the depths of the 2008 recession, when inflation was low but pay was falling.

More people might join the workforce as they run down their savings. The labor force participation rate for adults aged 25 to 54 was 82.3% in June, still modestly below the level of 83% reached at the highest of the last expansion. For older Americans, labor force participation is even further below pre-pandemic levels.

At some point, if inflation doesn’t give, consumers seem bound to crack.

Amy Willson,

a New Orleans small-business owner and mother of three boys, said she feels demoralized about her family’s financial prospects—and the country’s.

“There’s definitely that feeling of just like, we’re in the pits and I don’t really see a way out,” Ms. Willson, 38, said.

Her husband, Joel, a musician, lost his wedding and church gigs at the beginning of the pandemic. Ms. Wilson’s business, which provides childbirth education classes and doula support to new moms, also took a hit. Relief payments, government unemployment checks and savings helped the family stay afloat.

As the nation reopened in 2021, Mr. Willson went back to work, and business at Ms. Willson’s Louisiana Baby Company boomed. The Willsons contacted a lender to see if they could start the process of getting pre-approved for a loan to buy a home.

“And then as the months went by we were like, “Ooh, ooh, oh no, oh no,’” Ms. Willson said of how their expenses began to surge. In addition to gasoline and food, their costs went up for electricity, car insurance and monitoring a security system.

They scrapped plans to sign their boys up for music lessons this summer, and the house search went on hold.

“I’m feeling pretty scared, honestly,” Ms. Willson said. All of the family’s financial padding has gone to cover the higher cost of necessities. She estimates that their baseline expenses have gone up by $1,000 a month since March.

Ms. Willson especially misses being able to visit local businesses. “Even if it’s only $50 here and there, I really like to patronize the little guy. It’s just something we haven’t been able to do recently,” she says.

Write to Jon Hilsenrath at [email protected] and Rachel Wolfe at [email protected]

More than two-thirds of U.S. economic activity is tied to household spending. Recessions typically are accompanied by a pullback by consumers. Spending has surged during the pandemic, but it now shows signs of cooling.

Last year,

Alexandra Peña,

27, of Brooklyn, N.Y., was thinking, “Wow, we saved so much money.” She estimates she and her husband saved $21,000 between cancelled date nights and a postponed honeymoon, federal relief checks and her getting a higher-paying job. They used some of that to buy a Peloton exercise bike for their apartment.

Recently, however, inflation has shifted their perspective. Because of rising costs, she says, she has cut back on luxuries such as new clothes, manicures and haircuts, and she is trying to avoid eating out.

In February, she and her husband started looking for their first home purchase. But in recent weeks, after watching their stock portfolio sink and interest rates rise, they have put the search on hold.

“I look at my bills after going to the grocery store and wonder, ‘Who stole my credit card?’ ” Ms. Peña said.

A consumer pullback would be a big reversal if it gathers force. Spending jumped in 2021. At the end of last year, household purchases of cars, restaurant meals, clothing and other goods and services were up almost 7% from a year earlier, adjusted for inflation. This spring, between March and May, that growth rate settled to 2% from a year ago, slightly below average when compared to the previous two decades.

The hit from the pandemic proved short-lived for many. Two years since it began, household finances are remarkably strong.

At the end of March, households had $18.5 trillion socked away in deposit, savings and money-market accounts, more than $5 trillion above what they had heading into the pandemic, according to Federal Reserve data.

Cash reserves rose across income groups.

JPMorgan,

tracking 7.5 million of its own accounts, found that checking-account balances averaged nearly $1,400 among its lowest-income customers in the first quarter, up from under $900 before the pandemic. Among its highest-income accounts, balances rose to almost $7,000 from less than $5,500.

Median checking-account balance, by income quartile

Four-week rolling average for households

Median checking-account balance, by income quartile

Four-week rolling average for households

Median checking-account balance, by income quartile

Four-week rolling average for households

Median checking-account balance, by income quartile

Four-week rolling average

for households

Median checking-account balance, by income quartile

Four-week rolling average for households

Many Americans used federal relief checks to pay down debt, according to surveys by the Federal Reserve Bank of New York. Household financial obligations—including monthly rent, mortgage payments, car leases, homeowners’ insurance and other recurring bills—were 14% of their disposable income in the first quarter, according to the Fed.

That was historically low. Heading into the recessions of 1991, 2001 and 2007, that share was 17% to 18%, meaning households had less income after meeting regular payments. As unemployment rose, households cut back on spending to pay their bills.

The three- to four-percentage-point difference between then and now adds up to a lot—roughly $550 billion to $725 billion of yearly income collectively that households can save or spend.

Until stocks fell into a bear market in the second quarter, household wealth also was abundant. Net worth—assets such as homes and stocks minus debts—was eight times disposable income at the end of the first quarter, greater than 6.7 at the height of the 2000s housing boom and 6.2 during the 1990s tech bubble, according to the Fed.

“Consumer demand continues to be strong for us,”

John Lawler,

chief financial officer for

Ford

Motor Co., told analysts in June. “Our order bank is still very robust.” At 300,000, he said, the company’s order book still exceeded its ability to produce cars.

Executives at

Levi Strauss

& Co. said last week they were seeing moderation in demand for lower-end brands, though overall spending looked strong. “We really have not seen any softening or have heard really any concern about Levi’s [core brands] from our customers,” said

Charles Victor Bergh,

CEO. Revenue in the second quarter was up 15% from a year earlier; households were shifting from online shopping to shopping in stores, the company said.

Nycole and

Brady Walsh

have been doing their own calculations lately from their Austin, Texas, home.

The past decade and before weren’t easy. Nycole, 40, emerged from nursing school in 2008 with $40,000 in student loans and a national economy in deep recession. She scaled back wedding plans when her mom, who was helping fund the event, lost her job. She also sold a house at a loss.

A decade of careful budgeting, and some good fortune, left her better off. She and a new husband, 42-year-old Brady, bought another home in Austin, which doubled in value, and she paid off the student loans.

Before 2020, they made it a tradition to visit

Disney

World in Florida and Disneyland in California once each year. Then Covid put those trips on hold. The family returned to Disney World in May and booked a follow-up trip to Disneyland, where they are vacationing again.

The latest trip, however, includes modest but potentially telling changes in their behavior. With inflation soaring, they’re cutting back on how much they’ll spend on Mickey Mouse souvenirs for their two children to bring home. They’re also ordering fewer cocktails at the pool.

“As a millennial parent, I think we’re just so used to everything being hard at every juncture,” Nycole said. “If it’s not a plague then it’s a recession. Or it’s another recession. Or it’s a terrorist attack. It feels like I just expect it at this point.”

Consumer psychology is an ingredient in spending decisions, and consumers’ nerves right now look more frayed than their bank accounts.

“People really hate inflation,” said

Andrew Haughwout,

director of household and public policy research at the New York Fed.

The University of Michigan, which has been surveying households for decades about their beliefs about spending, inflation and the economy, finds consumer sentiment deeply depressed. It is at levels typically associated with recession, even though the majority of Americans say they are better off than five years ago and expect to be better off five years from now.

Its index of consumer sentiment in the second quarter was about as low as at the depths of the 2007-09 recession, when the unemployment rate hit 10%, compared to June’s 3.6% rate. The sentiment index was much lower than it was at troughs during 1991 and 2001 recessions.

It is a remarkable finding because another survey, by the Conference Board, finds the share of households who believe jobs are easy to get is near the highest in decades, thanks to historically low unemployment.

In this case, inflation, not lack of jobs, is the driving force of household malaise.

The Michigan survey shows that many households believe now is a terrible time to shop, especially for big-ticket items like cars and household appliances—worse even than the recessions of 2001 or 2007-09.

Consumer opinion on whether

jobs are easy or hard to get

Consumer opinion on

conditions for buying vehicles

Consumer opinion on whether

jobs are easy or hard to get

Consumer opinion on

conditions for buying vehicles

Consumer opinion on whether

jobs are easy or hard to get

Consumer opinion on

conditions for buying vehicles

Consumer opinion on whether

jobs are easy or hard to get

Consumer opinion on

conditions for buying vehicles

Consumer opinion on whether

jobs are easy or hard to get

Consumer opinion on

conditions for buying vehicles

“Consumers signaled strong concerns that inflation will continue to erode their incomes,” Joanne Hsu, who runs the Michigan survey, said of the latest reading. “While consumer spending has remained robust so far, the broad deterioration of sentiment may lead [consumers] to cut back on spending and thereby slow down economic growth.”

How people say they feel doesn’t always align with what they’ll do.

A survey in April by the New York Fed found that nearly a third of 1,300 respondents planned a vacation in the next four months, the highest in the survey’s seven years. Their spending plans for vehicles and furniture were stable.

“The situation is a little bit unique,” said

Wilbert van der Klaauw,

director of the New York Fed’s Center for Microeconomic Data. “There might be pent up demand for services like vacations.”

Hotel traffic has been climbing, according to STR Global, which tracks travel behavior. Stays at U.S. hotels totaled 117.5 million in June, up 8.2% from a year earlier. The Transportation Security Administration cleared 24.5 million travelers at U.S. airports between July 1 and July 11, up 10.6% from a year earlier, though still below pre-pandemic levels.

Cumulative number of travelers passing

through TSA checkpoints

Cumulative number of travelers

passing through TSA checkpoints

Cumulative number of travelers

passing through TSA checkpoints

Cumulative number of travelers passing

through TSA checkpoints

Cumulative number of travelers passing

through TSA checkpoints

Economists say the outlook for consumer spending depends heavily on whether the nation’s inflation fever recedes. Even though jobs are plentiful and unemployment very low, vast numbers of Americans find their cost of living is rising faster than the income they’re bringing home.

Not only is that discouraging, it is eating into those savings socked away during the pandemic. Adjusted for inflation, weekly worker paychecks in June were down 4.4% from a year earlier—the worst month since the depths of the 2008 recession, when inflation was low but pay was falling.

More people might join the workforce as they run down their savings. The labor force participation rate for adults aged 25 to 54 was 82.3% in June, still modestly below the level of 83% reached at the highest of the last expansion. For older Americans, labor force participation is even further below pre-pandemic levels.

At some point, if inflation doesn’t give, consumers seem bound to crack.

Amy Willson,

a New Orleans small-business owner and mother of three boys, said she feels demoralized about her family’s financial prospects—and the country’s.

“There’s definitely that feeling of just like, we’re in the pits and I don’t really see a way out,” Ms. Willson, 38, said.

Her husband, Joel, a musician, lost his wedding and church gigs at the beginning of the pandemic. Ms. Wilson’s business, which provides childbirth education classes and doula support to new moms, also took a hit. Relief payments, government unemployment checks and savings helped the family stay afloat.

As the nation reopened in 2021, Mr. Willson went back to work, and business at Ms. Willson’s Louisiana Baby Company boomed. The Willsons contacted a lender to see if they could start the process of getting pre-approved for a loan to buy a home.

“And then as the months went by we were like, “Ooh, ooh, oh no, oh no,’” Ms. Willson said of how their expenses began to surge. In addition to gasoline and food, their costs went up for electricity, car insurance and monitoring a security system.

They scrapped plans to sign their boys up for music lessons this summer, and the house search went on hold.

“I’m feeling pretty scared, honestly,” Ms. Willson said. All of the family’s financial padding has gone to cover the higher cost of necessities. She estimates that their baseline expenses have gone up by $1,000 a month since March.

Ms. Willson especially misses being able to visit local businesses. “Even if it’s only $50 here and there, I really like to patronize the little guy. It’s just something we haven’t been able to do recently,” she says.

Write to Jon Hilsenrath at [email protected] and Rachel Wolfe at [email protected]