- Consumer spending has been strong for the past year as Americans have recovered from the pandemic.
- But now, the fear is that spending will decline, hindering our economic progress.
Is consumer spending about to shrink? Maybe.
In 2020, when job loss was rampant and millions of Americans suddenly found themselves having no choice but to dip into their savings to deal with income loss, many people cut back on nonessential spending. Things changed in 2021, though.
In the course of the year, the economy got stronger and jobs became more widely available. Also, COVID-19 vaccines made it possible for more people to go back to work safely, and the return of in-person school gave working parents a much-needed reprieve.
Since mid-2021, consumer spending has generally been strong, and that's actually led to an extreme uptick in prices. Whenever the demand for commodities exceeds the available supply, prices have the potential to rise. And that's what we've been grappling with over the past several months as supply chains have failed to keep pace with consumer spending patterns.
But while an increase in spending is good for the broad economy, one payment app is worried about that pattern reversing in the near term. And if that were to happen, we could see unemployment numbers pick up substantially.
Is consumer spending heading for a decline?
In early February, PayPal executives issued a warning during the company's earnings call that consumer spending is about to decline, and possibly in an extreme manner. Chief Financial Officer John Rainey blamed that on a combination of the omicron surge and inflation.
While wages went up across the board in 2021, inflation rose at such a rapid pace that workers, on average, wound up with a pay cut. And the fear is that lower-income households especially will need to cut back on spending to compensate for higher living costs. That could cause a ripple effect where businesses lose revenue and let staff go, leading to an increase in unemployment numbers.
Should you anticipate layoffs?
Right now, the job market is strong, and many companies are actually pretty desperate to hire. But if you work for a company that's been barely hanging on since the start of the pandemic, you may want to shore up your finances in case things take a turn for the worse -- and dust off your resume in case you need to start looking for work.
That said, many jobs won't be impacted by a drop in consumer spending. And even if consumers start cutting back on essentials like food, for example, it doesn't mean your grocery job will automatically be compromised.
But it still wouldn't hurt to pump some extra money into your savings account in the coming weeks if that's possible. That way, you'll have a cushion in case your circumstances take a turn for the worse.
Will a decline in spending fuel another stimulus round?
A big reason lawmakers approved several rounds of stimulus checks during the pandemic was to kick-start the economy and aid in its recovery. If spending falls to a notable extreme, a fourth stimulus check could be a possibility. But we'd need to see a pretty drastic drop in spending for another stimulus check to be justified -- and that's not something we should hope for.
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