Does Economic Uncertainty Actually Impact Your Spending Habits?
The worst of the pandemic may be over, but the economy is still feeling its lingering effects. That has some people worried a recession is on the horizon. A lot of people, in fact.
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A recent poll of economists by the World Economic Forum found that nearly two-thirds of respondents believe there will be a recession in 2023. The good news is that many analysts say it should be pretty mild and short (sometimes referred to as recession with a small “r”). Others, however, disagree that there will be a recession at all.
That’s left many Americans concerned about what could happen next — and it’s apparent in their spending habits.
Does Economic Uncertainty Impact Spending?
“One of the most important things to remember about consumer spending is that it’s part of the cyclical economy,” said Boyd Nash Stacey, senior economist at Prevedere. “So whenever we go into a recession, we are coming out of a time of expansion.”
During expansion, he explained, consumers generally have a positive sentiment toward the economy and are more likely to make bigger purchases (cars, homes, etc.). During a recession, on the other hand, they may dip into their savings and rack up debt.
“So during economic uncertainty, we tend to see a shift in where consumers spend their money,” Stacey said.
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How Consumers Alter Spending Habits During Uncertain Times
Overall, economic uncertainty can have a significant impact on consumer spending habits, according to Sean K. August, CEO of The August Wealth Management Group. Generally, it leads to a decrease in overall consumption and changes in spending priorities, he noted.
Here’s a closer look at how spending shifts during uncertain economic times:
Decreased consumer confidence: Economic uncertainty often leads to a decrease in consumer confidence, which causes people to feel less secure in their financial situation. “When people are uncertain about their financial future, they are less likely to spend money on non-essential items,” August said.
Increased savings: Uncertain times may also prompt people to save more money as a precautionary measure, in case they lose their jobs or experience some other financial emergency. August said that this can lead to a decrease in consumer spending, as people have less disposable income to spend on goods and services.
Changes in spending priorities: Economic uncertainty can also cause people to change their spending priorities, according to August. “For example, people may be more likely to prioritize essential items such as food and housing over luxury items like vacations and entertainment,” he said.
Delayed purchases: Consumers may also decide to wait on making large purchases until they feel more financially secure. In general, there’s less spending on big-ticket items such as homes, cars, appliances, electronics and other purchases that require a major financial investment.
Stacey noted that each economic cycle is unique, and changes in consumer spending tend to depend on how the economy changes.
For example, he said wages and jobs have mostly grown over the last few years (with the exception of a few specific industries), so income levels have grown with inflation. As a result, many consumers have continued to spend on discretionary items.
“This has kept the economy moving forward much longer than originally predicted,” Stacey said. “But as consumers’ savings deplete and the Fed continues to tighten its policies and raise interest rates, consumer spending will catch up with sentiment and start to decrease.”
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