US Consumer Spending Expectations Soar, Despite Pessimistic Earnings, Income

Despite the less-than-dismal state of consumer finances that is expected to envelope much of the US following the expiration of the fiscal stimulus bill come December 31, it appears that Americans have little intention of curbing their spending anytime soon.

In fact, even though income and earnings growth expectations have been significantly dismal, with expected income growth remaining unchanged at 2.14% and median one-year ahead expected earnings growth sitting at 2.0% for the fifth consecutive month, the latest NY Fed consumer expectations survey found that consumers’ 1-year ahead spending growth expectations soared to 3.73% in November – the highest reading in over four years. Not only is the latest reading an increase from the 3.06% in October, but also 33% higher than the 2.8% recorded in November 2019, making this reading the biggest year-over-year increase in the series’ history.

The puzzling increase also occurred concurrently with varying labour market signals, which showed the perceived probability of losing one’s job in the next twelve months fall from 15.5% to 14.6% in November, all meanwhile expectations that the unemployment rate will rise one year from now increased to 40.1% – the first increase since July. However, the list of paradoxes do not end there: the NY Fed noted that the sudden increase was predominantly influenced by respondents with annual incomes below $50,000.

But, the paradox continues: a number of respondents revealed they expect to raise their spending plans even while simultaneously reporting increased pessimism regarding the state of their personal finances come 2021, as well as expectations about increased taxes in the coming year. Then, expectations for a rise in stocks slid from 40.8% in October to 38.54% in November, the lowest reading since August of last year. In addition, expectations for an increase in interest rates on savings accounts also took a nosedive in November.

So the money question remains: Why is there so much spending optimism despite such bleak economic expectations? Well, the most plausible explanation is that US consumers anticipate future fiscal stimulus plans will be paid for by soaring government debt, which will in turn pay for any and all incremental purchases that have already been factored in, regardless if there is any earnings or income growth at all.

As the NY Fed points out, “expectations of continued program expansion or benefit-level increases remain considerably higher than pre-Covid-19 levels,” meaning that US consumers have finally caught wind of the what US corporations have already known for a long time: purchasing power (and thus consumer happiness) in America can only be derived from debt. Thus, with an incoming administration that is going to be eager to unleash even more hoards of debt, it only makes sense why so many US consumers, many of which are already drowning in substantial levels of debt, share so much optimism about their future spending plans.

Information for this briefing was found via the NY Fed. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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