The all-mighty American consumer, whose spending drives the economy, is reaching a breaking point and is on the verge of folding, according to former Walmart CEO Bill Simon.
Mr. Simon told CNBC in a recent interview that a series of factors—political polarization, inflation, and high interest rates—were all working together to undermine consumers and their propensity to spend.
“That sort of pileup wears on the consumer and makes them wary,” Mr. Simon told the outlet. “For the first time in a long time, there’s a reason for the consumer to pause.”
Consumer spending is a major driver of the U.S. economy, accounting for roughly two-thirds of gross domestic product (GDP).
Mr. Simon, who now serves on the Board of Directors for Darden Restaurants and Hanesbrands Inc., said that, after a long period of cheap money cut short by the Federal Reserve's rapid rate hikes in response to soaring inflation, consumers are now beginning to buckle.
"Consumers had an incredible 10-, 12-year run," he told CNBC's "Fast Money" program. "Markets were buoyant. Interest rates were low. Money was available."
But now, the music has stopped, and the party is grinding to a halt.
Faced with soaring inflation that remained persistently high despite predictions that the price spike would be short-lived, Fed officials have pushed the benchmark federal funds rate quickly from near zero in March 2022 to its current range of 5.25–5.5 percent.
Despite all the monetary tightening so far, inflation remains uncomfortably high.
The government released the latest data on inflation on Thursday, showing that the Consumer Price Index (CPI) rose 3.7 percent in September, matching August's pace. While that's down from a recent peak of 9.1 percent in June 2022 and lower than the 8.2 percent pace a year ago, it's still well above the Fed's inflation target of 2 percent.
Even though a number of Fed officials have, in recent days, suggested that the rate-hiking cycle may have reached its peak, newly released minutes detailing internal discussions during the Fed's latest rate-setting policy meeting in September show most of them think one more rate increase is in store—followed by a period of higher interest rates for "some time."
The higher-for-longer interest rate environment means tighter financial conditions, marked by more expensive borrowing and reduced lending, putting a damper on economic activity. It also tends to mean less consumer spending.
Inflation 'Still Above Comfort Levels'
Mark Hamrick, senior economic analyst at Bankrate, told The Epoch Times in an emailed statement that even though inflation has fallen from its recent peak, it's still well above many consumers' comfort level.
"For consumers trying to manage their personal finances amid inflation, the situation with prices is a bit like battling illness. Being past the worst of it isn’t the same as feeling better or robust," he said.
Many economists see a relatively high probability of a recession in the coming year, with signals like waning consumer confidence an often-cited canary in the coal mine.
Waning Consumer Strength?
With persistently high inflation and a deteriorating economic outlook, September saw consumer confidence fall for the second consecutive month to hit a four-month low, according to the Conference Board.
Also, expectations about the economic outlook over the next six months dropped below the Conference Board's recession threshold of 80, reflecting waning confidence about business conditions, job availability, and earnings.
"Write-in responses showed that consumers continued to be preoccupied with rising prices in general, and for groceries and gasoline in particular. Consumers also expressed concerns about the political situation and higher interest rates," Dana Peterson, chief economist at the Conference Board, said in a statement.
All that consumer worry is likely to translate into reduced spending if it hasn't already. The latest consumer spending data is for August, and it shows personal consumption expenditures (PCE) growing 0.4 percent that month, less than half of July's pace of 0.9 percent.
A recent survey carried out in September by CNBC-Morning Consult found that 92 percent of U.S. adults have cut back on spending over the past six months.
Looking forward, over three-quarters of those polled said they plan to cut back on spending for non-essential items.
Further, a recent survey of consumer expectations from the New York Federal Reserve shows that more U.S. households report being financially worse off now than they were a year ago.
Forty-one percent of households say they're financially worse off than a year ago, up from 40 percent in August.
Unsurprisingly, given the Fed's series of aggressive rate hikes and speculation that more could be in store, households' perceptions of and expectations for credit conditions deteriorated.
The survey also gauged consumer spending intentions one year ahead. While these remained unchanged in September at 5.3 percent, they generally fell steadily from a peak of 9.0 percent in May 2022.
A number of large retailers, such as Target, have reported a drop in discretionary spending.
“There is some real concern about weakness in the consumer,” Sarah Hunt, a partner at Alpine Saxon Woods, told Bloomberg TV in an interview at the end of September.
“There’s a real spending issue coming up and I think that’s going to impact earnings.”
