Recent data from Bank of America (BAC 0.97%) and Citigroup (C 3.26%) show that consumer spending remains strong. Not only that, but consumers are saving money and still have account balances much higher than pre-pandemic levels.
Consumers have higher deposit balances, which could lead to "stickier" inflation or higher inflation for a while longer. Here's what you should know about the state of the consumer and what areas of the economy are being affected.
NYSE: BAC
Key Data Points
Fiscal stimulus amid the pandemic resulted in soaring consumer deposits
Consumer deposit growth has been staggering. During the pandemic, enormous fiscal and monetary stimulus resulted in growing consumer account deposits. This deposit growth has given consumers a stronger balance sheet and more savings to absorb rising costs.
According to Bank of America, consumer deposits remain high compared to where they were before the pandemic. The bank measures this by breaking its customers down into cohorts and seeing how their savings have fluctuated.
One cohort Chief Executive Officer Brian Moynihan cited during the company's earnings call this month was customers with account balances between $2,000 and $5,000 before the pandemic. In early 2020, these customers had an average account balance of $3,400. In 2022, the average account balance for customers in this cohort peaked at $13,400. Even with inflationary pressures, those customers' account balances are still an average of $12,800 -- far above pre-pandemic levels.
There has been a question about whether consumers will spend down these balances or save them up. Why does this matter?
Services spending is still high: Will this lead to "sticky" inflation?
Consumer spending trends are strong. For Bank of America, consumer spending was up 10% in 2022 compared to the year before. However, consumer spending was more robust earlier in the year at 14% and wasn't as strong in the fourth quarter, when it was up 5%.
What consumers are spending on is important as well. According to Moynihan, consumers are spending more money on services and experiences -- a stark contrast to a couple of years ago when goods spending was robust. The CEO says these spending trends could keep unemployment rates low.
However, Moynihan thinks this could continue to put inflationary pressures on services costs. Because consumer account balances are strong and spending is being devoted to services, price increases and possibly wage increases in that sector may continue as companies scramble to fill positions.
According to data from the Bureau of Labor Statistics, there are more than 1.5 million job openings in the leisure and hospitality industries -- far above pre-pandemic levels. Inflation in the services sector could be "sticky," and companies may need to raise wages to attract candidates to fill those job openings. According to Citigroup Chief Executive Officer Jane Fraser, a resilient jobs market is keeping services inflation "painfully persistent."
US Job Openings: Leisure and Hospitality data by YCharts
Consumer savings could cushion the blow of a recession
Despite recent layoffs at several large tech companies, the unemployment rate is still low at 3.5%. For this reason, Fraser sees the Federal Reserve raising interest rates and holding them higher than the market expects. However, she says this is an unusual market and that "this isn't going to be like a normal recession."
Although consumers have withdrawn some of their deposits, these balances remain high. In a recession, consumers may find themselves dipping into these built-up savings. However, the health of their balance sheets may make the recession less severe than anticipated.
As an investor, it's important to keep an eye on inflation and interest rates. Recent bank earnings reports suggest that sticky inflation could lead to higher interest rates. If spending remains strong in the services sector, it could keep inflationary pressures elevated, and the Fed could keep its foot on the brakes with higher interest rates for longer -- leading to a recession sometime later this year.
This year could make for another volatile year in the stock market. However, if the Fed's actions do ultimately bring inflation down, that could pave the way for a more normal investing environment and the next bull market in stocks.
