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Jeremy Owens: Hello and welcome to On Watch by MarketWatch. I’m Jeremy Owens.
It’s a critical week for the US economy with a Federal Reserve meeting, earnings from all the big tech players and a fresh jobs report arriving during a perceived slowdown for the economy. But here’s the thing, the economy’s been pretty strong, all because of us. Americans are still spending, even as the job market has slowed and inflation has continued to batter us. And that’s really because we have to. The financial demands of the summer, especially on families, have not ceased. With back to school season upon us parents are expected to spend hundreds of dollars per kid on top of all the summer vacation and camp payouts they’ve already spent. So that’s what we’re going to talk about today, what the economic data tells us about the strength of the American consumer and how families are dealing with the spending of summer. Plus, we’ll tell you what you should be looking for from all the news hitting this week. First, let’s talk about the economy.
If there’s one thing that MarketWatch reporter, Jeffry Bartash has tried to drum into my head since we worked together, it’s to never bet against the American consumer. But my faith was tested last quarter when Starbucks and McDonald’s executives said that customers were starting to cut back in the face of withering inflation. But maybe that’s not actually a widespread problem. The McDonald’s CEO said again this week that customers are staying away because of price increases, but economic data shows they may just be spending it elsewhere.
Jeffry appears to be right again, retail sales numbers showed increased spending that outpaced inflation in the spring and summer so far. A recent report on US gross domestic product also went against any talk about drastic economic slowdown during the summer months thanks to spending on vacations and eating out. But that doesn’t mean that American consumers are happy about their spending. Inflation has caused us to mostly get the same stuff as last year and the year before that, but pay a lot more for it.
So we invited Jeffry onto the show to talk about the staying power of the American consumer and how long it can possibly last. So Jeff, what is the state of the consumer right now? We heard from some CEOs last quarter that they saw consumers pulling back, cutting out some of their spending. What is the data from the government shown us? What is the state of the American consumer right now?
Jeffry Bartash: Americans are still spending plenty of money. They cut back early in the year, but what we just saw in the period from April to June the second quarter, is that consumer spending actually accelerated. People spent more on clothes, on furniture and recreational goods, and those are things you buy when you’re feeling pretty good. So that bodes well for the school shopping season. And of course we’re likely to see an increase in spending in July as well because of the big sales from Amazon Prime Day and other companies that try to keep up with that. So things are looking pretty good overall.
Jeremy Owens: Yeah. And Jeffry, you mentioned back to school shopping there. Let’s talk about how important that is to the economy. No matter how much it may annoy me that I now have to spend this much on clothes and shoes for my kid, this is something that the economy really counts on and that economic data counts in, right?
Jeffry Bartash: Well, consumers account for about 70% of everything that goes on in economy. So they are the main engine of the economy. They’re the ones who keep the economy growing and keep us out of recession. And when you see a good amount of spending in the back to school season, it’s usually a prelude to pretty good Christmas shopping season and that bodes well for the economy in the second half of the year. But what also might help consumers is that the Federal Reserve is likely to cut interest rates, and if they do, that’s going to help sales of appliances, of cars, of houses, and that could give further stimulus to the economy.
Jeremy Owens: And when you say the Fed’s likely to cut interest rates, you’re kind of looking forward to that September meeting. Right, Jeff?
Jeffry Bartash: Many members of the Federal Reserve have already been kind of signaling that an interest rate cut is likely in September. The Fed is somewhat concerned that if they don’t cut rates, the economy could slow further and jeopardize the recent expansion. I think the Fed also wants to provide more relief for Americans because after several years of high inflation, consumers are definitely feeling more stress and the stress we see from consumer surveys is especially being felt by lower income families. So lower interest rates would help reduce credit card payments, it would make it easier to make car payments. It would go a long way in helping people in the country who are feeling the most stress of high inflation, to stretch their dollars a little further.
Jeremy Owens: And there’s definitely stress being felt right now. I mean, I feel like with inflation, we talk about consumers spending more money this year, but they might be getting the exact same amount of stuff.
Jeffry Bartash: There’s no question about it. To some extent, people have to spend more money to get the same amount of goods because prices are so much higher compared to three years ago. The average increase in inflation over the last three years has been 20%. So if you go to grocery store, you go to your hairdresser, you go to a barber, you’re paying more for pretty much everything. And so that is one reason why people are spending more.
But we also see when people are spending more on things like travel, which was a big thing in June, that’s something you don’t have to spend on. So if people are spending on things like travel and recreation, furniture and all that, that suggests they feel comfortable enough even with high inflation to spend a little more on things they actually want.
Jeremy Owens: And I do think that consumers are feeling stretched but are still spending, and that has helped the economy a good bit. We have seen the economy slow down in other places, Jeffry. We saw the jobs report where we’re kind of seeing the labor market dip a little bit. We’ve seen some other things, but recently we’re getting much stronger reports, especially when we look at GDP and the inflation report from last Friday. Both were really strong and went against what we’ve seen in a lot of the reports before that.
Jeffry Bartash: It’s puzzling to some economists. The expectation was that the persistent and lingering inflation and high interest rates were going to slow the economy a lot more than it has been the case. And part of the reason why the economy probably hasn’t slowed as much is the unemployment rate is still near historical lows. And even if the labor market is not as hot as it was a few years ago, most people are working, and as long as people are working they can continue to keep spending and that’s greasing the wheels of the economy and keeping everything spinning forward. If the jobs market were to deteriorate, if the unemployment were to rise a lot more, obviously that would put a big dent in the economy and even raise the risk of recession. But we’re not just seeing much evidence right now that the labor market is going to catch a big chill.
Jeremy Owens: And that’s the one thing we’re really looking at for the Fed. I mean, the Fed has the ability to cut these interest rates, that does look like inflation is getting a little bit closer to their goal. Where is inflation right now in terms of the path and where we see it going?
Jeffry Bartash: The Federal Reserve’s preferred inflation gauge is running about 2.5% over the past year. Now before the pandemic in 2020, inflation was averaging around 1.6% a year. That’s a pretty low rate historically. So the current rate of inflation is not that far away from where it was four or five years ago. The problem of course, is that we’ve had so much inflation the last couple of years, that doesn’t go away. So even if inflation slows, we’re seeing consumer sentiment surveys that people are still frustrated because they’re paying much higher prices than they were several years ago.
Jeremy Owens: Yeah, Jeffry, you talked about consumer sentiment right there. What is the sentiment right now among Americans?
Jeffry Bartash: Every month we get surveys of how consumers feel about the economy, and the most recent ones show that people are still very frustrated about inflation. Although most of the stress is being felt by middle and lower income families, wealthier families are doing pretty good. The stock market is near record highs. Many of these families locked in at low interest rates with their home mortgages several years ago when rates were very low. So they’re actually doing quite good. So you’re seeing this kind of dichotomy in the economy right now where a large part of the country is doing quite well and another part is struggling. And that’s what we’re seeing in the surveys of consumer sentiment. And that’s going to persist for a while because the inflation pf the last few years, it’s going to take a long time to fade away.
Jeremy Owens: And we’re not seeing the wage gains that would make up for inflation. Wage growth is outpacing inflation, but not by much. And it seems like it’s going to take a long time for these lower and middle income Americans to catch up to the purchasing power they had before the inflation spike.
Jeffry Bartash: That’s certainly true. Economists estimate it could take anywhere from three to five years for incomes to catch back up to the point where people feel financially as comfortable as they did five years ago. So people have to cope with this for some time. But what we’re seeing is that people are shopping for lower price goods, they’re buying store brands instead of name brands. We’re seeing that everywhere. People are just trying to find ways and being more selective about what they buy.
Jeremy Owens: And it’s going to be a balancing act, like you say, for a couple of years here. And if everything goes the way the Fed kind of wants it to go, it’s just going to be a struggle we might be going through, it’s been termed the vibecession, where the economy goes well, but people are still struggling and having a hard time paying for everything through inflation.
Jeffry Bartash: Yeah, no one’s immune from this. And even someone like me, I do okay, but I make my lunch every day. It’s like I go to a store nearby and they see what the prices people are charging, I don’t want to pay these prices. Millions of people like me are doing the same thing. We’re making more of our lunches, we’re not spending as much going out for lunch, we’re finding ways to cut back, and we’re trying to just spend on the things we really need or really want, and we’re kind of cutting out the things that we can get by without.
Jeremy Owens: And we expect that to be how it goes moving forward, but obviously anything can happen. So we’ll keep talking about this and have you back again. Jeffry, thank you so much for joining us.
Jeffry Bartash: My pleasure.
Jeremy Owens: We’re going to take a quick break. Coming up back to school shopping and how you can make it work for you.
Welcome back to On Watch by MarketWatch. Before the break, we talked with Jeffry Bartash. Now we welcome MarketWatch personal finance reporter, Venessa Wong to discuss a topic that hit me in the gut recently, back to school shopping.
Now I feel like I’ve already been bombarded for a month by back to school ads streaming into my inbox, and all I kept saying was, after spending thousands of dollars on a summer vacation and camps for my kid, why would I want to spend even more right now? But there’s an answer to that question, because it might’ve been cheaper. With those sales over the same school supplies at the same store are going to cost me more. For some parents that could be hundreds of dollars more. So what can we do to survive the relentless summer spending demands? Venessa joined me to break down what parents are expected to spend on back to school shopping and talk through some ways that we can save a little bit on it.
Well, Venessa, I first started thinking about this in July when I got all those ads for Amazon Prime Day and all the other events, and it felt really early to be talking about back to school shopping.
Venessa Wong: Yeah. My kids just got out of school at the very, very tail end of June, and then a couple of days later there were sales for back to school at Target and Walmart. And then Prime Day is in part a back to school sales event now, so there goes my vacation, right? It’s a big retail season for companies at this point. Families expect to spend about $875 on back to school supplies this year. So this include clothing, shoes, electronics, which is about as much as family spend on average during the winter holidays, which is famously the time when we spend a lot of money. But that spending has moved up to the summer as well, which is a very expensive time for a lot of households when they have summer camp expenses and vacations that they’re taking. So this quiet little period in our lives between the end of one school year and the beginning of another is actually working out to be extremely expensive.
Jeremy Owens: Yeah. Those numbers kind of blew me away, and it seems like more than half of it is on clothes. That seems to be the biggest input that you’re spending on right now.
Venessa Wong: That’s right. Yeah. So what I think we think of traditionally as school supplies is a small percentage of this overall spending. So when I first saw the numbers, they didn’t exactly make sense to me because I was like, how many crayons could you possibly buy? Right?
Jeremy Owens: Yeah. We both got younger kids, so it did not click in for us, but it is more the other things besides the pencils and pens.
Venessa Wong: Exactly. It’s about $140 for school supplies. And this is based on survey data from the National Retail Federation, but the bulk of it is on other things that probably a lot of older students need. But a lot of expenses right now are being shifted from school districts to parents. And I think that’s why you see kids coming home with lists of cleaning supplies and basic paper products that the classroom would need that isn’t being funded by the school districts anymore.
Jeremy Owens: The real swing cost here could be electronics. If your kid needs a new TI-85 calculator, a new laptop, a new smartphone, anything before going back to school needs new technology, that’s where it’s going to cost you. Laptops are a little more expensive right now than they have been in the last couple of years. So that’s where parents could really face a huge bill coming up. Right?
Venessa Wong: Right. And I think there’s a sense of surprise and maybe shock among people who didn’t have to buy these types of electronic supplies when they were in school, but it is part of what’s expected of kids these days. My child who’s still in elementary school, his school is shifting a lot of their testing onto computers at this point. And also our school district has prepared parents for remote school moving forward instead of snow days where we got to just sit at home and watch Ricki Lake or whatever.
Jeremy Owens: You just really showed your age shouting out Ricki Lake, but shout out to Ricki Lake. What’s up Ricki?
Venessa Wong: Yeah, I’m just saying. They will be doing Zoom School as they were in the pandemic so it’s just important right now for kids to have devices so they can keep up with what’s expected of them at schools. And not all schools are providing these devices to them, whether they’re laptops or tablets or whatever it is. So this is something, a new expense that parents have to deal with, whether they’re prepared for it or not.
Jeremy Owens: Yeah, I’m not prepared. I am not prepared. Venessa, and I suppose this is just being a parent in the summertime. But summer vacation followed by summer camps, followed by back to school shopping, that’s why I didn’t want to think about back to school shopping. That’s why I got annoyed when I realized it was that time again and I started getting emails from Target and Amazon for their sales, really pushing school supplies on me. But it is what it is for summertime and being parents.
Venessa Wong: That’s right. And I just want to point out that we’re at a point right now where raising a family is a really financially stressful thing for a lot of parents. Families with young kids are significantly more likely to report financial insecurity than households that don’t have kids or households that have adult children. So it’s just really expensive when you’re talking about housing affordability crisis, when you’re talking about the cost of childcare now, which around the country in almost every state is equal to or greater than mortgage costs and rent. Families are stretched when it comes to big expenses like shopping for school supplies or whatever the case might be. And that’s why about 10% of parents that were surveyed say they expect to go into debt for back to school shopping.
Jeremy Owens: Well, Venessa, what can parents do to kind of alleviate some of this pressure that we are all feeling now after the relentless spending needs of summer?
Venessa Wong: So there are three main things that you can do. One is to plan ahead. So when I spoke to financial planners and just parents who post about their experiences on social media, the advice is if you know you’re dealing with these large expenses on an annual basis, the best thing you can do for yourself is plan for it, set aside a certain dollar amount every month into a high yield savings account so that when that expense comes up, you’re not putting it on a credit card and paying interest for it afterwards which I think is great and sound advice if you’re able to. A lot of parents are also buying secondhand right now. They’re buying pre-owned back to school products like clothing and electronics. So it’s a solution. It’s a limited solution though. And in the Deloitte survey, parents said that parents who plan to buy pre-owned save about 7% compared to those who plan to buy new.
So it’s something, right? It doesn’t sound like a lot, but it’s something. And sort of all of those small decisions that you make eventually add up to hundreds of bucks that make some impact on your wallet. The cost of supporting a middle-class quality of life for a family is just exceptionally high right now. And we’ve all listened to a lot of the financial advice out there, which is just that if you can’t afford it, don’t do it. It’s not wrong. I just feel like it’s asking people to hold back on a lot of pleasure that they would rather enjoy during their lifetime.
Jeremy Owens: But I think it’s much easier to hold back on your own pleasure but when you’re looking at your kids’ schooling, when you’re looking at experiences for your child that you may never have a chance to do again, it’s much harder to say no to that. Even if you kid’s not asking for it, if you’re trying to provide for your child, if you’re trying to give your child something and you probably can’t afford it’s much harder to say, “Well, I can’t afford it, can’t do it,” than if it’s for yourself. At least in my case.
Venessa Wong: That’s 100% correct. And the data that we were talking about in these surveys doesn’t even include spending for extracurricular activities. It was very interesting, parents are extremely willing to spend money for their kids’ extracurricular activities because they consider it an investment in their future. But I think the bottom line is that parents want to give their kids the best lives that they can plausibly offer them. And I don’t fault people for that. I think it’s what we feel our obligation is as parents.
Jeremy Owens: Yeah. And our financial obligations as parents is now officially part of your beat Venessa. So if you have any thoughts or questions about family finances, reach out to Venessa and we’ll have her back on later to talk about this some more. Thank you so much for joining us.
Venessa Wong: Thanks so much for having me.
Jeremy Owens: Before we go, it’s time for what we are watching a look at the news you need to know for the rest of the week and beyond.
First, after talking to Venessa, I gave a call to the founding editor of MarketWatch Picks, Katie Hill, for some other back to school shopping tips. She suggested looking out for sales tax holidays in your state. The Federation of Tax Administrators has a list of participating states on their website, taxadmin.org. She also mentioned taking advantage of price matching offers from major retailers and said, if your kid can wait a bit for new clothes, sales over the Labor Day or especially the Columbus Day holidays may offer better deals.
After the Federal Reserve meeting this week, the message was exactly what we talked about on previous episodes of this show. Jobs may be matching or exceeding inflation and importance for the Fed coming up. Officials toned down their language on inflation while highlighting their dual mandate to protect the job market while managing pricing pressures. The read-through on that is if the job market continues to soften, the Fed would likely act to cut interest rates, even if inflation hasn’t hit their 2% target. The next jobs report is Friday, so make sure to keep an eye on it.
The biggest earnings report so far this season was more about promises for AI in the future than performance right now. Microsoft disappointed with cloud and software growth, but executives promised that growth would improve in the second half of the year thanks to AI. Big after-hours stock declines were tempered by that optimism, but how much longer will Wall Street believe these promises from big tech as executives spend billions on their AI efforts? Well, we’ll talk more about that next week.
And that’s it for this episode. Thanks to Venessa and Jeffry for joining us. To keep following the latest on consumer spending and back to school shopping head to marketwatch.com. You can subscribe to the show wherever you get your podcasts, and please do. If you like what you heard, please leave us a rating or review. It really helps others discover the show. And let us know what you want to hear from us. You can reach us at On Watch at marketwatch.com. The show is hosted by me, Jeremy Owens, and produced by Alexis Moore and Jackson Cantrell. Isaac Gaines mixed this episode. Melissa Haggerty is the executive producer.
We’ll be back next week with a new episode, and until then we’ll be watching.
