Americans are watching their spending as they burn through the pandemic savings

Americans are burning through the excess savings they amassed at the start of the coronavirus pandemic, stoking concerns among a growing number of businesses about the outlook for consumer spending once the one-off stimulus ends.

This fourth-quarter earnings season, several consumer-focused companies have hailed the resilience of an economy as wages are rising, unemployment remains at record lows, and Americans are squandering on experiences they missed out on when the pandemic began. Demand for premium vodkas, custom Starbucks orders and Disney theme park tickets is booming, executives report.

However, others have warned of a renewed caution among buyers. Lower-income customers in particular are cutting back on their purchases of everything from kitty litter to mattresses as inflation keeps prices high and they spend money saved thanks to stimulus packages and lower spending following the Covid-19 outbreak.

Estimates of those savings vary, but analysts at Morgan Stanley calculated last month that US households will spend about 30 percent of their $2.7 trillion in pandemic “excess savings” in 2022. That cushion has completely disappeared for many poorer consumers, they added.

“In general, families at the lower end of the income spectrum run out of excess savings, and if anything, they are exhausting their savings,” said Gregory Daco, chief economist at EY-Parthenon. There is now a “K-shaped” pattern in consumer spending, he said.

“The wealthy are the ones who are still relatively free to spend, but are still more cautious,” he said of inflation and high interest rates. “It’s the lower and middle end of the income spectrum that’s struggling stubbornly given these high prices.”

This split is leading to mixed statements from executives, even as companies across sectors are becoming more cautious about forecasting the outlook for the coming months.

Noting how many Americans have used up their excess savings, Tyson Foods CEO Donnie King told analysts this week he expects consumers to be under more pressure for the rest of this year. Mattel found that higher-priced toys were hit by “macroeconomic challenges,” with sales of its American Girl dolls falling 16 percent.

At the same time, Hilton Worldwide CEO Chris Nassetta highlighted the over $1 trillion in excess savings consumers are still sitting on as a boost for the hotel sector.

“They spend it, and they probably read the papers and watch the news and get more nervous,” he said, but hotel operators have benefited from a parallel shift in spending from goods to experiences like travel.

“The confusion in some of these headlines suggests that the economy is moving at different speeds depending on the economic sector,” said Michelle Meyer, chief economist for North America at the Mastercard Economics Institute.

“We are in an environment where the economy is the right size and that will feel different depending on the economic sector. For some sectors it will be a nice acceleration but for others it will be a contraction,” she said.

Mastercard’s SpendingPulse tracker found that U.S. retail sales excluding autos rose 8.8 percent year-on-year in January, but the headline numbers masked wide disparities between sectors. Sales of furniture and home furnishings fell 1.2 percent even as people’s travel budgets increased and restaurant spending rose 24.2 percent.

With household balance sheets generally “in pretty solid shape,” “consumers have money but they’re nervous,” Hugh Johnston, PepsiCo’s chief financial officer, told the Financial Times. They avoid big purchases, “but they want an affordable treat,” he said.

Several companies differentiated between wealthier and poorer customers, with Diageo welcoming the growing market for premium spirits priced at $50 or more per bottle, and Yum Brands highlighting growing interest in cheaper menu items like Taco Bell’s $2 burritos.

“We see that the high-end consumer continues to stay there [but] The low-end consumer has been where much of the deterioration has been,” Scott Thompson, CEO of mattress maker Tempur Sealy International, told analysts.

Pet owners were trading from premium to “value” litters, Church & Dwight told investors. “I don’t know if we’re technically in a recession or not, as judged by economists, but I can tell you that our consumers feel like we’re in a recession,” said Barry Bruno, chief marketing officers. As inflation drove up the cost of basic necessities, “it’s forcing them to make tough choices.”

A University of Michigan poll on Friday confirmed that high prices were still weighing on consumers even as inflation eased, keeping sentiment 22 percent below the index’s historical average.

Daniel Sullivan, Edgewell’s chief financial officer, said the razor and sunscreen maker hasn’t seen price cuts but wouldn’t be surprised if pricing became more promotional in its markets. “We’re looking at the data, especially the recent spike in credit card usage, and that’s usually a pretty good indicator,” he noted.

More cautious consumer sentiment has played into a corporate earnings season in which earnings average just 1.6 percent above expectations, according to Refinitiv I/B/E/S. Over the past 30 years, major US public companies have beaten forecasts by an average of 4.1 percent, making this “surprise factor” the weakest since the crisis-hit fourth quarter of 2008.