As the recovery from the Covid-19 pandemics lockdowns had its greatest force for consumer spending, home buying boomed, and homebuilding followed. Retail purchases soared in every major category. However, that picture has now changed. Rising interest rates have made home ownership too expensive for many, and inflation has cut deeply into the buying power of people’s incomes, resulting in real spending slowing accordingly. Now, looking into 2023, prospects hardly point in the direction of growth and prosperity. Instead, they point to a developing recession, if the economy is not already in one.

American Dream at Risk: Rising Interest Rates and Inflation Threaten Home Ownership and Consumer Spending
Economic Slowdown Ahead: How Rising Interest Rates and Inflation are Impacting American Consumers

Consumer Spending on Homebuying and Homebuilding Led the Recovery

Home buying and home building had led the recovery in the months following the worst of the pandemics lockdowns. During the second half of 2020 and in 2021, purchases of new homes leaped upward. By the end of 2021, buying was running at some 25% above pre-pandemic levels. Construction tried to keep up with the buying. Starts of new housing units had risen by the end of 2021, some 24% above pre-Covid levels.

Rising Interest Rates Impact on Consumer Spending Homebuying and Building

This year, both activities became casualties of rising interest rates, as inflation forced the Federal Reserve (Fed) to tighten credit. Since last March, when the Fed began its counter-inflationary efforts, rates on a 30-year mortgage have more than doubled, rising from a low of 3.29% to 6.5-7.0% recently. Not surprisingly, home ownership has become too costly for many Americans. Home purchases have tumbled, falling some 9.5% from March through November, the most recent month for which data are available. New construction starts followed, dropping 16.8% over the same time.

Declines in Homebuying and Building Affect Consumer Spending

Declines in homebuying and building have directly affected consumer spending, especially sales of furniture and appliances as well as home repair supplies. But consumer spending has suffered even more from the burdens imposed by inflation on real incomes. Even though wages have risen at historically rapid rates, inflation has increased living costs still faster. During the first three quarters of 2022, the Commerce Department reports that household incomes from wages and salaries rose at a 6.2% annual rate.

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Consumer prices, however, rose at an 8.0% annual rate during that time, more than offsetting the purchasing power of their expanded incomes. For a while, people tapped their credit cards to keep up their spending, but such behavior can only go so far. They had to slow the pace of new purchases. So, while retail sales during the first half of 2022 rose at an impressive 9.0% annual rate, they have barely grown at all in nominal terms since June. After accounting for the effects of inflation, real sales have actually declined.

Disturbing Slowdown in Consumer Spending

Especially disturbing in this slowdown is the wide pattern of decline so evident in the recent retail sales figures. In December overall nominal sales fell 1.1% from November’s level, 12.3% at an annual rate. Only four of the twelve major categories showed any nominal growth at all, much less real growth. Sales of big-ticket items had the steepest declines. Auto sales fell 1.2% in December alone. Furniture sales fell 2.5% for the month, and electronics fell 1.1%. This is telling because consumers, when they feel strapped, cut back on these sorts of big-ticket outlays first. Spending on such things is easier to postpone than spending on everyday things, such as soap or groceries, medicine, and the like. And indeed, food

The Future of Consumer Spending

It is important to note that December is just one month, and a single month’s figures do not a trend make. However, the trend is clear, and it points to a future where consumer spending will continue to slow, if not decline. As interest rates continue to rise and inflation continues to outpace wage growth, it will be increasingly difficult for Americans to afford the purchases they were making before the pandemic. This could lead to a decrease in economic growth and potentially even a recession.

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The government and the Federal Reserve will need to take action to address this issue if they hope to avoid a recession. This could include implementing policies that increase wages and reduce inflation, as well as taking steps to make home ownership more affordable. Additionally, it will be important to provide support to small businesses, which have been hit hard by the pandemic, as they are a major driver of job growth and consumer spending.

Conclusions

In conclusion, while the recovery from the pandemic lockdowns was strong, it appears that American consumers are no longer able to support the growth that was seen in the months following the worst of the pandemics. Rising interest rates and inflation have made home ownership and consumer spending increasingly difficult for many Americans. As we move into 2023, it is important for government and the Federal Reserve to take action to address these issues, if we hope to avoid a recession and maintain economic growth.

Poem on Growth, Homebuying, Inflation, Interest rates, Consumer Spending

Title: "The Growth That Was Lost" 

The world was moving fast, a growth unbroken,
As the economy soared, our dreams were awoken
To the promise of prosperity, a bright new day
But the pandemic came, and took it all away

Echoes of a crisis filled the air
As we watched our world, stripped of its flair
Closed businesses, lost jobs, and empty stores
A reflection of the pain that the crisis bore

But amidst the chaos, there was hope
As we came together, to help and cope
Government, banks and essential workers
Put their efforts to revive the growth like true performers

We learned to adapt, to live in a new way
To find opportunities in small things, each and every day
And though the echoes of the crisis remain
We will rise, stronger, from its chain

Echoes of a crisis, a reminder of the past
But it's time to move forward, to make our future last
With determination, innovation and unity, we will pave the way
For a brighter tomorrow, come what may.
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