US consumers are spending at record levels, and economists are mystified, struggling to forecast an end point

Perplexed and grappling with forecasting challenges, economists are witnessing a remarkable trend in American consumer behavior amid elevated interest rates, reduced savings, and persistent inflation. Despite these economic stressors, US consumers have displayed unrestrained spending habits. Black Friday saw a 1.1% increase in sales at physical stores compared to the previous year, while online spending reached a record $9.8 billion. Cyber Monday recorded a staggering 9.6% year-on-year surge, with consumers spending $12.4 billion. This spending spree aligns with the broader trend of robust US consumer spending, contributing significantly to the 4.9% Q3 growth in real GDP.

While some of this spending can be attributed to the rising costs of essential items, Americans are also making substantial purchases and allocating substantial funds to experiences. This carefree "You Only Live Once" (YOLO) attitude toward money contradicts historical spending patterns during economic downturns, leaving economists puzzled. Despite widespread pessimism regarding the economy among consumers, they continue to spend, defying expectations.

Economist Ellie Henderson from Investec notes the surprising resilience of consumers, especially in the face of a significant interest rate hike by the Federal Reserve Bank. Traditionally, following a crisis or job market contraction, there is a slight increase in consumer savings and spending. However, the San Francisco Reserve Bank (SFRB) reported an unprecedented surge in fiscal spending post-pandemic, surpassing the growth seen in previous recessions since the 1970s.

The substantial increase in savings in US households, propelled by the government's swift fiscal response to the pandemic, has played a pivotal role in this trend. Stimulus packages injected $5 trillion into the US economy, coupled with indirect policies such as eviction moratoriums and suspension of student loan payments, resulting in savings of around $2.3 trillion in 2020 and 2021. While some savings have been utilized this year, many consumers still possess reserves, some for the first time, and are inclined to spend despite uncertainties about a full economic recovery.

The Boston Consulting Group reports that the driving force behind this YOLO spending comes from younger segments of the upper-middle class, who, while not necessarily affluent, have sufficient income to meet their needs and indulge in leisure activities and luxury purchases. Many are embracing buy-now-pay-later (BNPL) platforms, contributing to the growth of these services, even during events like Black Friday.

Wendy Edelberg from The Brookings Institution acknowledges her surprise at the strength of consumer spending, especially considering the challenges posed by the pandemic. Despite deviating from economic precedent, some experts argue that this spending pattern aligns intuitively with people prioritizing present enjoyment amid uncertainty about the future. Shifting attitudes toward work and life also play a role, with individuals choosing to prioritize happiness and fun. According to Malcolm Harris, author of "Palo Alto: A History of California, Capitalism, and the World," these intangible factors often elude quantitative analyses attempting to explain macroeconomic trends.