U.S. Consumers and Businesses Exhibit Caution Amid Elevated Inflation and Interest Rates

U.S. consumers and businesses have adopted a cautious approach to spending this year due to elevated inflation and interest rates, according to Bank of America CEO Brian Moynihan. This cautious behavior is evident across various sectors, impacting overall economic growth.

Spending Slowdown

At a financial conference in New York, Moynihan highlighted that both households and small- to medium-sized businesses have slowed down their purchasing activities, ranging from hard goods to software. Consumer spending through card payments, checks, and ATM withdrawals has grown by about 3.5% this year, reaching roughly $4 trillion. This represents a significant deceleration from the nearly 10% growth rate observed in May 2023.

“Both of our customer bases that have a lot to do with how the American economy runs are saying, ‘You know what? I’m being careful, slowing things down,’” Moynihan stated, referring to consumers and businesses.

Consistent with Low Growth Environment

Moynihan noted that the spending slowdown began last summer and aligns with the "very low growth" environment experienced between 2016 and 2018. Nearly a year after the last Federal Reserve rate increase, consumers and businesses continue to grapple with higher inflation and borrowing costs. The Federal Reserve initiated rate hikes in March 2022 to curb inflation, aiming to slow the economy without triggering a recession.

Impact on Consumers and Businesses

Despite the Fed's efforts, higher prices for goods and services have affected U.S. companies, from McDonald’s to discount retailers, as Americans adjust their spending habits. For instance, food shoppers are visiting more store locations in search of deals. “They’re going to three grocery stores instead of two,” Moynihan observed.

The overall spending growth is primarily sustained by travel and entertainment, while other categories have moderated, with insurance payments being an exception. Growth in rent payments has also decelerated.

Importance of Consumer Spending

“We’ve got to keep the consumer in the game in the U.S. economy because they’re such a big part of it,” Moynihan emphasized. He noted that consumers are becoming more tentative due to the surrounding economic conditions.

Business Caution

Similarly, small- and medium-sized businesses are exhibiting caution. Business owners report feeling positive about their overall operations but are hesitant to hire new staff, purchase equipment, or invest in software at the previous pace.

Economic Outlook

Bank of America’s economists predict that inflation will take until the end of next year to stabilize, with the Fed expected to begin cutting interest rates later this year. Moynihan anticipates the U.S. economy will likely grow at around a 2% rate, thus avoiding a recession.

Behavioral Shifts

The now-tepid growth in overall spending is being propped up by travel and entertainment, while “other things have moderated, except for insurance payments,” Moynihan said. Growth in rent payments has slowed, he noted.

The cautious behavior of consumers is reflected in their shopping habits. Food shoppers are hitting up more store locations in search of deals. "They're going to three grocery stores instead of two," Moynihan pointed out, indicating a shift in consumer strategy to manage household expenses better.

Broader Economic Context

This downturn in pending home sales comes amidst broader economic concerns, with consumers and businesses showing increased caution in spending. The Bank of America CEO noted that U.S. consumers and businesses have turned cautious on spending, reflecting a broader economic slowdown.

In addition, the Department of Education's ongoing issues with the FAFSA process and subsequent full-scale review have added to the economic uncertainty, affecting consumer confidence and spending power.

Conclusion

The cautious spending behavior by U.S. consumers and businesses reflects the ongoing impact of elevated inflation and interest rates. This trend underscores the importance of maintaining consumer confidence and economic stability as the Federal Reserve continues its efforts to manage inflation without hindering growth. As businesses and households adjust to the new economic reality, the broader implications for the U.S. economy will continue to unfold, necessitating close monitoring and responsive policy measures.

The shift in consumer and business behavior underscores the delicate balance the Federal Reserve must maintain as it navigates inflation control and economic growth. The banking sector's insights, particularly from leaders like Moynihan, provide a critical perspective on the state of the economy and the necessary measures to support stability and growth moving forward.