USA TODAY International Edition

Slower spending and layoffs may come sooner than thought

- Medora Lee

Consumers have enjoyed the upper hand in the past year and a half, with a fistful of money, a pick of jobs, and great bargaining power. But those good times are about to end, some analysts warn.

Despite surging inflation and economic contractio­n last quarter, many economists still mostly avoid recession talk. Instead, they focus on positives like strong consumer spending and savings and ample jobs. But upon closer inspection, even those pillars are showing cracks, some say.

“The tide has turned,” said Michael O’Rourke, chief markets strategist at JonesTradi­ng. “Stagflation is a legitimate, if not likely, threat.”

It’s true, consumer spending has continued to power the economy. When the economy unexpected­ly shrank 1.4% last quarter, economists pointed to the 2.7% increase in consumer spending as a silver lining. Consumer spending accounts for about two- thirds of the economy.

Travel industry executives also tout strong bookings for the coming summer season, showing that consumers are still “revenge spending,” or determined to spend no matter what the price to make up for time lost due to the pandemic.

But how consumers are supporting that spending might be key. In March, the savings rate dropped to 6.2%, the lowest level since December 2013.

“Consumers are dipping into the savings amassed during the pandemic to keep spending afloat in the face of blistering inflation,” said Diane Swonk, chief economist at Grant Thornton. This is because wage increases haven’t kept pace with inflation. Average hourly wages rose 5.6% over the 12 months that ended in March, but consumer inflation jumped 8.5%.

“The niggling worries are still there that as the cost- of- living squeeze intensifies and as savings are eaten away, there may be less appetite to pay for an easier life,” wrote Susannah Streeter, a

senior investment and markets analyst with Hargreaves Lansdown, in a commentary. “With many supermarke­ts and restaurant­s set to pass on the cost of higher commodity prices, more consumers may begin to trim budgets by starting with little luxuries like ondemand delivery.”

There are other signs a drop in discretion­ary spending may come sooner than later, too, especially if prices keep rising. The share of adults planning to book trips over the next year dipped slightly in March from February, according to the latest consumer spending survey by Morning Consult.

“There are two competing forces at play: the pent- up demand driving “revenge spending” on categories like travel, versus growing concern about inflation and rising price sensitivit­y starting to impact discretion­ary purchases,” said Kayla Bruun, a Morning Consult economic analyst. “So far, the “revenge spending” seems to be winning out, but more recently – especially starting in March – we began to see signs that inflation concerns, and price sensitivit­y are starting to have more of an impact.”

The Great Resignatio­n – record numbers of people quitting in search of more flexibility, benefits, and higher wages – has been one of the biggest stories of the pandemic. For now, the job market still looks strong – April saw employers add 428,000 jobs, 38,000 more than Bloomberg’s mean estimate from economists. But that’s not likely to last either, some say.

Amazon, the second- largest employer in the country, recently surprised analysts when it said it had over- expanded and now had too many workers and needs to cut costs. Other businesses like Netflix and Robinhood, which were high flyers during the pandemic, also announced layoffs. Meta, Facebook’s parent, ordered a hiring freeze.

High demand and shortages everywhere forced a lot of businesses, including Amazon, to bulk up fast. However, with inflation high and demand likely to wane, more businesses will find that they also expanded too much and will start cutting back or not hiring at the same pace, O’Rourke said.

“There are implicatio­ns for a broad spectrum of the economy, from jobs to investment­s in transporta­tion and equipment, warehouses and real estate,” he said “Most alarming is that Amazon is a company that usually gets it right.”

This is likely to swing the pendulum back to employers. So people who are still playing musical chairs with jobs may end up without a chair, some warn.

“We have employees making “demands” of management regarding even coming back to the office,” said Matthew Matigian, chief executive at Blue World Asset Managers. So this shock “is what I am predicting will yield the re- set on people’s current expectatio­n that higher- paying jobs will always be easy to find or that as an employee you get to take zero risk, have no responsibi­lity yet somehow direct company policy.”

 ?? SEAN GALLUP/ GETTY IMAGES EUROPE ?? Amazon recently said it had over- expanded and now has too many workers and needs to cut costs.
SEAN GALLUP/ GETTY IMAGES EUROPE Amazon recently said it had over- expanded and now has too many workers and needs to cut costs.

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