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MNI INTERVIEW: US Consumption Decline Could Play Out Slowly


The Federal Reserve's inflation goal could remain out of reach for some time as consumers continue to draw down excess savings to make up for lost spending during the pandemic, even as the pieces fall into place for a gradual easing of price increases, St. Louis Fed economist Fernando Martin told MNI.

Higher interest rates should incentivize consumers to save more and spend less, but with excess savings of roughly USD372 billion still at their disposal and USD721 billion in missed spending during the pandemic, consumption is likely to continue to boost growth at least through the summer, Martin said in an interview.

"Households still have some excess income from the fiscal packages. That’s slowly dying off, and until it does, people are still spending that. So despite the fact the Fed has been raising rates and creating an incentive to save more, that effect of excess savings hasn't completely disappeared yet," he said.

The amount of estimated excess savings represents about half a month of consumption and is likely to be spent down over the summer as people travel and move homes, Martin said. But, "we are still behind in total consumption. The privations during the pandemic have not been made up. Maybe I forwent a vacation as planned, and this is perhaps the time to go and maybe I'll splurge on that."


How quickly demand will deflate and pull down inflation is a key topic of debate for the Fed as it prepares to pause rate hikes. Real U.S. consumption has been persistently elevated after bouncing back from a precipitous drop at the start of the pandemic. It returned to the pre-pandemic trend of 2.4% annual growth in March 2021, the same month that inflation crossed 2% and has exceeded trend ever since. (See: MNI INTERVIEW: Fed's Barkin 'Very Open' To More Tightening)

A first-quarter jump of 3.7% in consumer spending, which accounts for more than two-thirds of U.S. economic activity, contributed 2.5pp to GDP growth, the most since the second quarter of 2021. But there are signs of softening.

Martin expects overall consumption to weaken though he emphasized the large degree of uncertainty on the post-pandemic new normal. Households are still buying more goods and fewer services than before 2020, keeping core goods PCE inflation above 3% compared to -0.6% in the 2016-2019 period.

"We should be patient with the data trends. The price of goods seems to have stabilized -- the demand for them is elevated but hasn't been growing much. But it used to decline on average, so we still need to wait for that to happen. We’re not even close to that. That may take a while."


Core services prices excluding housing costs, an aggregate that Fed Chair Jerome Powell noted is important for understanding how inflation will evolve, are also showing persistence, and make up half of all expenditures.

"This measure moves very slowly because a lot of the contracts embedded in the prices don't get updated very frequently and so sometimes reflect the past. But the steady trend tells you there's persistence in prices and it won’t come down to 2% super fast. By the end of the year we’ll have a cleaner picture of where we are," Martin said.

The housing market is a "big unknown" and may be a good barometer of the return to normal, he added. Housing services inflation saw a significant acceleration in 2022 and is just beginning to come off its peak, lagging real-time rent data. Employers are also still figuring out remote work policies, which will affect people's choice of living arrangements.

A recession is not preordained to moderate demand, Martin said. "There's a scenario under which activity slows down and you see layoffs but we don't see the unemployment rate go up, so we won't have a recession. Or if we do, it's going to be mild. If things persist the way they are, a recession is not really necessary for this mechanism to operate."

MNI Washington Bureau | +1 202-371-2121 |
MNI Washington Bureau | +1 202-371-2121 |

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