Household Spending Resilient Amid Oil Crisis

It seems someone forgot to inform American consumers that they should feel really down right now.

Consumer spending in April saw a rise of 0.5%, according to the personal consumption expenditure statistics released by the Bureau of Economic Analysis. Since the conflict between the U.S. and Iran began, along with rising gasoline prices, there’s been a 1.49% increase in spending over the last two months. This translates to an annualized increase of about 9.3%. Year-over-year, spending is up 3.9%.

Though the significant price hikes in March and April contributed to this increase, it really emphasizes consumer resilience. Many economists had warned that Americans would likely cut back on spending elsewhere to cope with higher gas prices, but that hasn’t been the case.

Taking a closer look at the broader spending categories from the PCE report, spending on durable goods rose by 1.7% from March to April, marking an annualized increase of 10.7%. Compared to April of last year, spending on durable goods is up by 3.2%.

Specifically, spending on auto parts increased by 2.2%, reflecting an annual growth rate of 14.1%, despite a slight dip in April. While furniture and durable home equipment saw a minor decline last month, they still increased by 1.19% over two months, showing a 7.4% annualized rise.

Interestingly, discretionary spending categories, which one might expect to retract under pressure, are instead making consistent gains. Expenditures on recreational services rose by 1.9% over the past two months, resulting in a 12% annualized increase. Similarly, food, beverage services, and lodging saw a 0.95% gain, yielding an annualized rate of 5.8%.

On the other hand, the segments showing the weakest performance were clothing and footwear, which grew only by 0.37% during the two months, and health services at 0.48%. That said, it’s not entirely clear if this signals weakening consumer strength. In fact, spending on apparel and footwear was up by 7.3% in April compared to a year earlier, suggesting that the recent slowdown might just indicate an earlier shopping boom rather than genuine consumer distress. Health services spending also increased by 5.9% year-on-year.

Examining the Consumer Sentiment Survey

This increase in spending contrasts sharply with the University of Michigan Consumer Sentiment Index, which plummeted by 12% from an already disheartening 56.6 in February to a mere 49.8 in April. By May, it fell further, hitting an all-time low of 44.8. So, while Americans seem eager to spend, they are also conveying to economic pollsters that this might be the worst time to do so.

What accounts for this paradox? One factor contributing to the decline in consumer sentiment is purely partisan politics. The University of Michigan’s Democratic Sentiment Index dropped to 32.8 in April, lower than figures seen during the 2008 financial crisis and the pandemic lockdowns of Trump’s first term. According to a recent Economist/YouGov poll, 55% of Democrats view the economy as being in a recession, with 29% expecting it to enter one within the next year.

Democrats aren’t the only ones feeling the pinch; emotions regarding gas prices are notably low. Expectations for the Democratic Party hit rock bottom in February, March, and April of the previous year. A significant portion of Democrats seems convinced that Trump’s actions have put the economy in jeopardy.

Yet it’s not solely partisanship at play. Independent sentiment is grim as well, and it’s even worse among Republicans. While this might be linked to rising gas prices, another popular theory suggests that consumers are becoming permanently pessimistic about the economy, burdened by a series of distressing economic events stretching back from the dot-com bust to the housing bubble, the financial crisis, and the lingering effects of inflation under Biden. It’s tough to maintain optimism when it feels like a disaster is perpetually on the horizon.

However, it’s worth noting that underlying economic conditions likely support consumer activity. Unemployment rates are low and have been stable for some time. Unemployment claims are at their highest since they began to decline. Corporate profits and stock market prices are reaching new highs, and business investment is robust, aided by Trump’s tax and regulatory policies and advancements in artificial intelligence. Companies are anticipating rising labor costs alongside even stronger sales growth.

In economics, real activity often matters more than emotional sentiment. Recent data has shown that both demand-side and supply-side economic activities are on the rise.