Bank of America (NYSE:BAC), peering through the eyes of its data, says consumers seem to have hit the brakes on spending. The CEO of the second largest bank in the U.S., Brian Moynihan, thinks inflation and rising interest rates are causing both consumers and businesses to tighten their belts. If the tightening trend does not go too far, we may be headed for an economic soft landing.
Data Signals a Shift in Spending Patterns
Moynihan said there is a shift in spending patterns while speaking at a financial conference in New York this week. He shared insights from data on the bank’s customers, which include millions of households and small-to-medium-sized businesses (SMBs). The statistics paint a clear picture of a deceleration in economic growth. As evidence, he points out that consumer spending via debit cards, checks, and ATM withdrawals, which a year ago grew at nearly 10%, is now experiencing growth of just 3.5%.
This slowdown began last summer and is reminiscent of the more modest growth environment experienced between 2016 and 2018. While some might see this as cause for concern, Moynihan says “very low growth” reflects a cautious consumer adapting to the new economic reality.
Inflation’s Impact
The Federal Reserve’s efforts to combat inflation through interest rate hikes appear to be having an impact, with the stock market reaching new highs this year. However, for everyday Americans, the impact of higher prices for essentials is undeniable. Consumers are grappling with sticker shock, which is leading to adjustments in behavior like visiting multiple grocery stores to find the best deals.
This consumer spending shift is impacting businesses across the board, from large chains such as McDonald’s to discount retailers. While some discretionary sectors like travel and entertainment are enjoying more rapid growth, and super-core expenses like insurance payments are much higher, overall spending on everyday goods and services has moderated. In fact, even rent payment growth has shown signs of slowing.
Consumer and Business Demand
The health of the U.S. consumer is the heart of the nation’s economic well-being, and SMBs are the backbone. Moynihan discussed the growing financial strain and emphasized the need to keep consumers engaged in the economy. The cautious consumer sentiment extends to small and medium-sized businesses, which are also exhibiting a more conservative approach. This is reflected in business owners’ hesitancy to expand, which has caused hiring, equipment purchases, and software investments to slow down.
Road Ahead Is Still Optimistic
What Moynihan described as the road ahead could be seen by optimists as the often illusive economic “soft landing.” Bank of America’s economists predict that inflation will be brought under control by the end of next year, paving the way for potential interest rate cuts from the Fed later in 2024. They project the U.S. economy to maintain a modest growth rate of around 2%, avoiding a recession.
Key Takeaway – Decelerating Economy Offers Investment Opportunities
Economic growth is decelerating. While the current economic climate presents challenges, it also offers investment opportunities. Sectors like travel and entertainment, which are showing continued growth, might be attractive. Additionally, companies that cater to budget-conscious consumers could see increased demand.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
