AMZN Spending Surge Masks a Growing Consumer Divide

SPEAKER_1 (0:00)

For more on the state of the consumer, let's welcome in Joanne Hsu, the Director of the University of Michigan's Surveys of Consumer. Joanne, great to have you on here. Now, we keep getting all of this data. Consumers are feeling worse and worse. We're tightening our belts, we're pinching pennies. And yet I look at the spending data, and I spent a lot of yesterday talking about the Amazon Prime Day's spend and how it was up year over year, and we're expecting record holiday shopping. How are you looking at what the consumer is saying about how bad they feel versus what they're actually doing right now?

Joanne Hsu (0:33)

Well, there are a couple of things that are at play right now. So first of all, the majority of consumer spending as a whole is actually being driven by high wealth consumers. And those consumers are feeling okay about the economy because they're being supported by soaring stock market values.

And second of all, consumers have been loud and clear over the last five years since the end of the pandemic that the number one thing weighing on their views of the economy is the cost of living, declining purchasing power. And for a lot of the consumers, it kind of seems like they've given up on long term savings goals. And they are choosing to spend in the now instead. I mean, this isn't spending from a position of strength. We're very lucky that consumers don't necessarily feel like their jobs are on the line. But when we look at their income expectations, they are not expecting their incomes to outpace inflation. So if spending remains robust, that actually isn't necessarily a good thing for consumers.

SPEAKER_1 (1:31)

And Joanne, I saw a lot of headlines about it being a relatively small move in terms of this number. But is there an argument to be made that this is masking a much deeper concern about the actual health of the American consumer?

Joanne Hsu (1:46)

I mean, consumers are very, very clear that they are not feeling confident about their personal finances or about the economy in general.

As we all know, the tremendous growth in stock markets, a lot of the economic growth that we're seeing right now is being driven by AI optimism. And that's not something that consumers necessarily feel right now. And if consumers are spending strongly, if their spending is outpacing their income growth, that's not sustainable spending. That means people are spending out of their savings or their borrowing. And that's not necessarily going to be sustainable. And that's a vulnerability that could come to the fore pretty quickly if things start to contract.

SPEAKER_1 (2:31)

And inflation, short-term and long-term expectations are higher pretty much across the board here. How much of the increase in what you're hearing from consumers is tied directly to these higher energy prices that we're seeing versus just the general affordability crisis and the frustration with the current cost of living?

Joanne Hsu (2:50)

When we look at the fluctuations in income and inflation expectations over the past couple of years, they're very clearly responding to changes in the economic policy environment. So we saw inflation expectations surge last year, concurrent with the spike in tariff hikes. And that came down by the end of the year, but started picking up again this year with the Iran conflict.

So it's very clear that consumers are watching those energy prices, but it's not just about energy prices. Consumers are worried that those higher energy prices, the faster energy inflation is going to pass through to the economy more generally.

SPEAKER_1 (3:29)

So as we look at that with this expectation that those price pressures are going to pass through, we are going to see it reflected as prices are continuing to rise. At what point do these elevated expectations find themselves on the Fed's radar and become an actual problem for them? Because if they continue to persist, we will perhaps see some change in consumer behavior and businesses then also adjusting their behavior if they expect these price pressures to continue.

Joanne Hsu (3:56)

Absolutely. So one of the vulnerabilities in the economy that we're seeing right now is the fact that consumers are willing to spend despite their low sentiment. This is actually really bad for the Fed's fight against inflation. Because if inflation expectations continue to be high and they've been trending up, they're the highest since, I believe, May of this year and if they continue to rise, this is potentially problematic because it can become self-fulfilling. Consumers may respond to the expectation of higher inflation in the future by speeding up their purchases, by front loading their purchases now, or trying to negotiate higher raises at work. And those are both actions. If done by enough consumers in the economy could very well put additional reinforcing upper pressure on inflation. So what we really worry about when we're watching the economy is that these expectations could become self-fulfilling.