In recent times, U.S. consumers and businesses have taken a more cautious approach towards spending due to the rise in inflation and interest rates, as pointed out by Bank of America CEO Brian Moynihan. Whether it is families or small to medium-sized businesses, Bank of America’s clientele is scaling back their purchases across various categories, ranging from tangible products to software solutions. This trend has been observed at a financial conference held in New York, where Moynihan discussed the latest consumer behavior trends.
Moynihan revealed that consumer spending through card payments, checks, and ATM cash withdrawals has only increased by about 3.5% this year to reach approximately $4 trillion. This marks a substantial decrease from the impressive growth rate of nearly 10% seen back in May of 2023. He highlighted that both consumer and business bases that significantly contribute to driving the American economy are adopting a more careful and conservative approach towards their spending habits. This change in behavior began to manifest itself last summer and aligns with the subdued growth environment experienced between 2016 and 2018.
Approximately a year after the Federal Reserve’s previous rate hike, consumers and businesses are grappling with higher inflation and borrowing costs that continue to remain elevated. The Fed initiated measures to combat inflation by raising its benchmark rate starting in March 2022, aiming to moderate economic growth without causing a recession. Although many economists are optimistic about the Fed’s ability to orchestrate this delicate balance, the lingering effects of inflation are still felt by consumers and businesses alike.
As a response to increased price levels for goods and services, Americans are altering their spending habits, affecting companies ranging from fast-food giant McDonald’s to discount retailers. Consumers are now carefully examining deals and are more likely to visit multiple grocery stores to find the best prices. The pattern of spending has shifted, with a noticeable slowdown in the growth of rent payments. Although there is tepid growth in overall consumer spending, sectors like travel and entertainment are still experiencing growth, while others are witnessing moderation.
Business Impact
Small- and medium-sized businesses are also experiencing a similar trend, as indicated by the Bank of America CEO. The cautiousness towards spending is evident in business sentiment, as owners are hesitant to expand their operations, hire new employees, or invest in equipment and software solutions at the previously seen pace. Bank of America, being one of the largest banks in the U.S., has a privileged vantage point to observe these trends unfold across a wide array of businesses and households.
Moynihan and his team of economists anticipate that inflation will take until the end of the next year to stabilize, with the Federal Reserve likely to begin reducing interest rates later in the current year. Despite these challenges, Moynihan remains cautiously optimistic, projecting a 2% growth for the U.S. economy, thereby averting a recessionary scenario. Maintaining consumer confidence and reinforcing their role in the economy is crucial to navigating through the current economic challenges successfully.