July 6, 2022

Beata Caranci
SVP & Chief Economist
TD Bank Group

The Federal Reserve Chair Powell has repeatedly said that the U.S. economy is strong and can handle more rate hikes. Can it? The American consumer may beg to differ.

The third revision of a GDP report is usually a bore, but last week’s release of first quarter data was anything but. Revisions revealed a more hesitant consumer with a mark down of spending growth to 1.8% (annualized) from a previously reported 3.1%. This difference in underlying momentum is night and day, particularly considering that the first rate hike didn’t occur until the end of the quarter. It could be chalked up to the usual data volatility if not for a second quarter that is tracking even weaker, with spending growth ranging between 1.0% and 1.5%. This slowdown was fully expected in our baseline forecast, but it has happened earlier with data revisions revealing a softer underbelly. We hope this is just a “pull forward” of the dynamics of those expectations and not the beginning of a recession-mindset taking hold.

To some extent, household expenditures are being constrained by insufficient supply rather than an unwillingness to spend. Although spending on services has returned to pre-pandemic levels, large deficits remain within two categories that have struggled to hire sufficient staff to keep up with demand – recreation and transportation services. There’s a strong belief that pent-up demand exists within these categories, but as the saying goes…the cure for higher prices, is higher prices. Air transportation prices have risen at the fastest three-month annualized pace in history, while recreation is tracking a pace last seen in the 1990s. No surprise that the most recent Conference Board survey noted a softening in vacation plans as rising prices take their toll.

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