When the going gets tough in the U.S., the tough go shopping. The Commerce Department said Wednesday that retail sales surged 3.8% in January, the most in 10 months and well above the 2% median estimate of economists surveyed by Bloomberg. Sales among a control group that is used to calculate gross domestic product was even more impressive, soaring 4.8%, or almost three times what was forecast. The gains were broadly based, with eight of 13 retail categories showing an increase.
On the surface, this may seem like a head-scratcher. After all, just a few days ago the University of Michigan’s widely followed monthly index of consumer sentiment plunged to the lowest since 2011. The reason given for the tumble was that Americans’ views about their personal finances were deteriorating because of intensifying concerns about inflation.
But it seems clear that Americans are not too concerned about the highest rates of inflation since the early 1980s, or at least not concerned enough to alter their spending patterns in ways that could damage the economy and cause a marked slowdown. One reason may be that consumers are in a pretty good position financially to weather faster inflation until the supply chains that have largely contributed to rising consumer prices work out the kinks.
Consider that U.S. household net worth surged $34.1 trillion since the start of the pandemic to a record $144.7 trillion through the end of the third quarter, according to the Federal Reserve. That’s a whopping 31% increase over the six quarters ended Sept. 30. The all-time high for any calendar year before 2020 was $12.5 trillion in 2019.
Thanks to unprecedented fiscal and monetary stimulus from the government and the Fed, Americans built up $2.7 trillion in excess savings since the start of the pandemic heading into this year, according to Bloomberg Economics, about triple the normal level. Tom Porcelli, the chief U.S. economist for RBC Capital Markets, calculated that wages for 2021 were about $400 billion higher than they would have been had the pandemic never happened, using a pre-pandemic baseline. This means that consumers were sitting on almost an extra year of income gains.
And don’t forget that household balance sheets have improved tremendously since the 2008-2009 financial crisis. Consumers are spending a record low percentage of their disposable incomes to service their debt, according to Fed data going back to 1980. And the rise in gasoline prices, a notorious symbol for the spike higher in inflation, matters less to consumers these days. As my Bloomberg Opinion colleague Liam Denning has pointed out, spending on gasoline and other motor fuels as a share of disposable income is about half what it was in the first decade of this century.
No doubt inflation is causing hardship for some consumers who can ill afford higher prices, but it’s not clear that the damage from the recent spurt of inflation is widespread. Bloomberg News reported this week that even though decades-high inflation has eaten into earnings in recent months, the net effect over the past two years is still positive. Researchers at the Federal Reserve Bank of Dallas wrote in a blog post that wages have risen during the pandemic even when adjusting for changes in inflation and the makeup of the labor force.
To be sure, the months ahead will be a challenge. Bloomberg Economics said it expects growth in disposable incomes to revert to slower pre-recession trends given that most pandemic-era stimulus payments have ended. That means retail spending will have to normalize to lower, more sustainable levels this year.
Keep in mind, however, that betting against the U.S. consumer is often a sucker’s bet. The retail sales report just proved why.
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