Consumers moderated on their spending in January, but that was just a blip on a path toward continued increases in expenditures over the course of 2024. The real surprise was continued spending gains in 2023. Most of the reasons for last year’s growth will continue over into 2024, but at a slower pace.

The January 2024 data show a small increase in dollar spending but a tiny decline in inflation-adjusted expenditures. In 2023 consumers increased their total spending by 5.9% (December 2022 through December 2023). After inflation adjustment the gain was still 3.2%. The increase came despite the Federal Reserve’s sharp interest rate increases in 2022 and 2023.

Expectations for consumer spending had been low for two reasons. First, higher interest rates typically reduce purchases of cars and other big-ticket items. Second, higher rates typically lead to contractions in construction and other interest-sensitive sectors, triggering layoffs and lower household incomes.

In this cycle, however, the Fed’s tightening had less impact than usual. Interest rates influence some consumer spending, primarily cars, recreational vehicles and boats, but also to a lesser extent furniture and appliances. Cars constitute the largest of these categories, with an unusual twist last year. Supply chain problems left few new vehicles on dealer lots in 2021 and 2022, causing pent-up demand. Supply improved in 2023, so sales rose despite higher borrowing costs. Slightly offsetting automobile strength was a drop in RV and boat sales due to the higher interest rates.

Household incomes continued to rise over the course of 2023 thanks to rising employment along with ongoing wage increases.

Looking on to 2024 and 2025, we’ll probably see some lagged effects of the higher interest rates. Direct consumer spending effects will probably be seen in the first half of the year. And the other interest-sensitive sectors usually take some time to respond to the higher rates. Larger construction projects and many business capital spending projects have long lead times, so economic growth is likely to slow early this year due to those past interest rate hikes.

Propping up spending will be savings left over from pandemic stimulus. The calculation begins with the trend growth of total household savings in the years before the pandemic; the growth rate was used to extend the trend through the present. Then that trend was subtracted from actual savings to estimate “excess savings.” Most pandemic stimulus payments were saved, not spent. Excess savings accumulated to a peak of $2.3 trillion in August 2021. After a few months of level savings, families began spending some of their excess savings, but only gradually. They still have about $850 billion of excess savings. (Other economists’ estimates differ due to varying estimates of the underlying trend.)

Consumer attitudes have been somewhat negative lately, but probing the details yields a more optimistic slant. The Consumer Sentiment Index from the University of Michigan is well below its long-run average, though up from the high-inflation months of 2022. But respondents were much more positive about their personal finances than about the overall economy. Those who answered positively on their personal finances emphasized higher incomes. Those who were negative about their personal finances mentioned high prices as the biggest factor, followed by weak income.

Generally consumer attitudes are a result of economic factors. They can be an independent factor when non-economic issues intercede, such as war or terrorist attacks. With the positive economic news recently, attitudes won’t negate the money consumers have in their bank accounts.

Look for small-to-moderate gains in consumer spending over the course of 2024, improving in 2025.

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