A pedestrian wears a shirt on Wednesday, April 13.
Calla Kessler | Bloomberg | Getty Images
Sandy Magny plans to bring her teenage daughter to West Palm Beach, Fla., this summer, despite airfares soaring.
It won’t be cheap, but Magny doesn’t want to miss out on visiting her family. The 40-year-old paralegal, who lives in the Bronx and works in Manhattan’s Financial District, finds there are other things she can live without.
“I’ll bring more lunch,” she said. “I could make coffee in the office.”
Magny is one of millions of people beginning to migrate to where their dollars are going after two years of the Covid-19 pandemic. Consumer prices have risen at the fastest pace in four decades. The costs of everything from homes to lattes are rising, begging the question: When – and where – will consumers cut back on spending?
Some companies are already feeling the effects as they try to pass higher costs on to customers.
Amazon’s most recent quarterly revenue grew at its slowest pace since the dot-com bust in 2001. Netflix lost subscribers last quarter for the first time in more than a decade. Video game maker Activision Blizzard, appliance giant Whirlpool and 1-800-Flowers all reported weaker sales in the most recent quarter.
Meanwhile, companies from Ford to McDonald’s to Kraft Heinz and United Airlines have reported robust demand as consumers continue to spend despite higher prices.
The changes in consumer behavior are making some executives nervous.
“We believe consumers will spend,” Macy’s CFO Adrian Mitchell said at JP Morgan’s Retail Round-Up last month. “But will they spend on items we sell, or will they spend on a plane ticket to Florida or trips or going out to restaurants more?”
Coca-Cola CEO James Quincey told CNBC last week that customers “are not going to keep swallowing inflation.”
Consumer spending, as measured by the Department of Commerce, rose a seasonally adjusted 1.1% in March. And spending remains high even among low-income households with annual incomes of less than $50,000, according to Bank of America data. (The data excludes households that do not have access to maps.)
But consumer confidence, a Conference Board-reported measure of buyer sentiment about market conditions, fell in April.
“We don’t really see a lot of signs of a slowdown, despite the concerns that are emerging in the market,” said Anna Zhou, a U.S. economist at Bank of America.
One reason is the amount of money people have been putting away during the pandemic. On average, low-income households have $3,000 in their savings and checking accounts — almost double what it was in early 2019, according to internal Bank of America data pay more, Zhou said.
Just the good stuff
In addition to spending money, many customers are increasingly willing to spend money, whether it’s for an upgraded pair of Levi’s jeans or a premium seat on a Delta Air Lines flight.
Apple on Thursday reported a “record level of upgraders” in the first three months of the year as users opted for its premium iPhones, but warned of the impact of lockdowns in China. And with automakers raising prices to reflect tight inventories due to problems in the global supply chain, car seekers will not be deterred.
Ford CFO John Lawler said this week that despite price hikes, the company is still seeing exceptionally strong demand for its latest products, which range from the small Maverick pickup, which starts at around $20,000, to the Mustang Mach electric crossover. E range, which is available in higher trim levels, can cost well over $60,000. It is already sold out for the 2022 model year.
United, Delta and Southwest Airlines forecast earnings for 2022 thanks to seemingly insatiable customer demand for both leisure and business travel after two brutal pandemic years. Their own staff shortages keep them even more from flying.
According to travel agency data from Airlines Reporting Corp. For example, the average US domestic flight for travel between Memorial Day and Labor Day was $526, an increase of more than 21% from 2019.
“The demand environment is the strongest in my 30 years in the industry,” United Airlines CEO Scott Kirby said in an April 20 earnings release.
Travelers will proceed through Terminal A at Orlando International Airport on Christmas Day, Saturday, December 25, 2021.
Stephen M Dowell | Orlando Sentinel | Getty Images
Chip Bergh, chief executive officer of Levi Strauss & Co., told CNBC last month that despite rising prices, consumers are not turning to cheaper jeans. Levi reiterated its guidance for fiscal 2022, which calls for revenue growth of between 11% and 13% year over year.
However, there are signs that consumer appetites may be stretched.
According to Adobe Analytics, U.S. domestic airline bookings fell 2% in the first two weeks of April compared to the previous two weeks, the first drop in such a period this year. In March, bookings grew 12% from 2019, but customer spend on those tickets increased 28%.
Restaurant traffic fell 1.7% in March, according to industry tracker Black Box Intelligence. Gourmet restaurants, upscale casual restaurants, and family restaurants saw the biggest jump in revenue growth, but the segments are still trying to recover from pandemic lows.
Jodi Klobus, a 58-year-old mother of three and grandmother of four who lives outside of Albany, NY, told CNBC that she and her husband, a retired New York City police officer, ate out twice a week. Now that their meals and everything else is costing more, they’ve cut back to twice a month.
“I feel it in the wallet,” Klobus said.
Challenges in 2023
And there are other risks that could affect consumer spending, even if the impact isn’t immediate. Rents are rising and property taxes haven’t fully caught up with skyrocketing home values.
The Federal Reserve wants to fight inflation by raising interest rates. This leads to higher borrowing costs for homebuyers and credit card users.
In the fourth quarter, U.S. credit card balances rose $52 billion, the biggest quarterly jump in New York Fed data in 22 years, but they’re still down $71 billion from late 2019.
US credit card default rates rose to 1.62% from a more than three-decade low of 1.48% in the second quarter of last year, still a far cry from the peak of 6.6% in the first quarter of 2009 The St. Louis Fed brought up the rear of the Great Recession.
“Consumer spending should remain resilient this year,” said Zhou, economist at Bank of America. “It’s a little less certain for next year – and certainly in the second half of next year there may be a risk of further consumer slowdown.”
Boeing CEO Dave Calhoun said Wednesday demand for airlines’ new planes is recovering thanks to a resurgence in travel demand. However, it’s unclear whether Americans will continue to spend big on travel in the coming months or will reach a point where they will limit their travel.
“In this second year, when inflation starts to weigh on consumers’ pockets, these numbers are starting to really matter to us,” Calhoun said in an interview with CNBC’s “Squawk on the Street.”
Right now, many consumers, like Cindy Maher, a 58-year-old owner of a leadership development consultancy who lives in Bloomfield, Connecticut, are feeling comfortable enough to maintain their spending habits.
“I’m not taking shortcuts,” she said. “I’m only complaining about the prices.”
Maher said she noticed nearly $7 worth of loaves of bread and that it cost $70 to fill up her car’s gas tank. But she said in her two-income household, she could afford those costs.
“My heart goes out to those who have low-paying jobs,” she said.
-CNBC’s Amelie Luke and John Rosevear contributed to this article.