How Consumer Spending Habits Could Change in the Fourth Quarter of 2022

by Sherry Hao, Controller, U.S. Money Reserve

As uncertainty around inflation looms, some worry that Q4 2022 could prove to be difficult.

Consumer spending habits bolster the economy. Consumers keep the entire global network of supply and demand moving, and they help maintain the health of the world’s financial systems. When consumers stop spending or shift their habits significantly as a result of a widespread pandemic or rising inflation, for example, it can indicate bad news for the health of both the U.S. economy and the global economy.

With the threat of significant inflation and even recession on the horizon here in the States, consumer spending habits in Q4 could significantly change. Many experts anticipate that consumers will likely cut back on holiday spending, which could lead to a variety of effects in 2023. Here’s what you need to know about how consumer spending habits might change and impact your business in the fourth quarter of 2022 and what you can do about it.

Inflation Is Starting to Take a Toll on Consumer Spending.

Inflation, which has been with us here in the U.S. since mid-2021, is starting to take a toll on consumer spending and outlook. In October of this year, the Commerce Department showed that consumer spending was flat, according to CNBC.

According to the report, miscellaneous store retailers saw a drop of 2.5% for September, and gas station retailer sales fell 1.4%. Sales at furniture and home furnishing stores, electronics and appliance stores, sporting goods stores, and hobby, book, and music stores were also down.

On top of that, the Bureau of Labor Statistics (BLS) noted that the Consumer Price Index, “a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services,” rose by 0.4% last month as well. That means prices got higher for a common selection of goods and services that the BLS keeps track of to get an idea of the health of the economy. According to a separate piece at CNBC, the average consumer is now spending $445 more per month because of inflation, which will cut into consumers’ future plans for spending as we head into the holidays.

The holidays are typically when consumers flock to retailers for their end-of-year shopping. Most retailers offer some sales and events, especially the Friday after Thanksgiving, known as Black Friday. This is usually when retailers do their biggest business, and many large and small companies rely on holiday sales to bring in new revenue. Yet because of ongoing inflation, many experts believe that retailers will see lackluster holiday sales as consumers continue to pull back on their spending. Discretionary purchases (like gifts) are the first place consumers will pull back on spending when they become strapped for cash.

Discretionary Spending Could Continue to Dry Up.

Investopedia says a discretionary expense is “a cost that a business or household can survive without, if necessary.” Since a family can survive without that item or service, it is unnecessary. Things like eating out, sports games, vacation travel, events, or entertainment are all examples of discretionary items that families and individuals can get along without.

As consumers continue to pull back on their spending, discretionary spending will continue to see a decline. As noted above, spending on things like electronics and appliances was down by about 0.8% for the month of September. That means people are delaying replacing their older devices and appliances because prices have climbed to a point where they can’t justify the expense.

To counterbalance this, however, it’s important to note that not every discretionary spending sector is being pinched. In fact, a recent report showed that nearly 70% of Americans had planned to celebrate and perhaps even spend money on Halloween this year, which is on par with the numbers reported in previous years, according to CNBC. The National Retail Federation anticipated that Americans would spend up to $10.6 billion on Halloween this year, in fact. Since Halloween candy and decor don’t count as necessary spending, it’s safe to say there is still a glimmer of hope that consumers won’t slash their discretionary spending entirely in the next few months.

Credit Card Debt Will Continue to Climb.

Credit card debt has been on a steady climb for the last year, after a dip during the pandemic thanks to stay-at-home orders and months of lockdown. According to data from Lending Tree, credit card debt is a whopping $887 billion, and it’s headed higher as of the most recent information. According to Lending Tree, “Americans’ total credit card balance is $887 billion in the second quarter of 2022, according to the latest consumer debt data from the Federal Reserve Bank of New York. That’s a $46 billion jump from $841 billion in the first quarter of 2022.”

Those numbers are obviously delayed, and we don’t yet have Q3 data, but rising credit card debt isn’t a good thing since it means that to pay the debt off, Americans are going to have to start dipping into their savings or simply adding more debt. As the Fed continues to try and curb inflation by hiking interest rates, debt becomes more expensive for consumers, which may cause them to cut back even more on spending.

Housing Is Headed for a Reckoning.

As interest rates go higher (with another massive hike on the horizon after the most recent economic reports indicate that inflation isn’t slowing down), borrowing money for all kinds of purchases becomes more expensive. Nowhere does that have more impact than in the housing sector. As interest rates go up, the housing market will inevitably cool off because the price of a mortgage has gone up significantly from what it was just a year ago.

Many economists say housing is poised for a “realignment,” which is a nice way of saying a 20% or more fall in the coming quarters. According to a story at Business Insider, spring and summer of 2023 may be the right time to buy, depending on what happens with interest rates and prices.

GDP and Consumer Confidence Could Take a Hit.

If consumer spending takes a hit, there’s no question that the GDP (Gross Domestic Product) could take a hit as well. GDP “is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period,” according to Investopedia, and it is yet another measurement that indicates the health of a particular economy. GDP is intimately tied to consumer spending.

Consumer spending tends to follow the business cycle and economic health cycle, but it also affects the way consumers feel about their ability to purchase and own goods and services in an economy. It directly affects consumer sentiment (which has been somewhat all over the map in the last few months). The Congressional Research Service notes, “Consumer confidence due to economic conditions may increase purchases of durable goods (goods that can be used over a long period), such as vehicles or major appliances.” On the flip side, when consumers lose confidence in the economy, they pull back on spending.

More Consumers Will Walk Away From High Prices.

According to a story at Bloomberg, more people walked away from skyrocketing prices in September than they did in August. That indicates consumers are reaching a threshold where they will opt out of (or delay) purchasing something or choose an off-brand label or name as an alternative to combat increasing prices. As that story notes, “Last month, the net share of sticker-shocked shoppers who walked away instead of making purchases rose to 9.9% from 8.7% in August, according to Morning Consult survey data from its nationally representative monthly panel of 2,200 U.S. adults, which is weighted to reflect the product categories in the Consumer Price Index. Many consumers also continued to trade down at high rates.”

This means the economy could be reaching a tipping point where consumers start to significantly restrict or change their buying habits as they reckon with high prices and 40-year-high inflation.

The Bottom Line on What to Expect for Consumer Spending in Q4 2022

While most of the economic indicators point toward dire straits for the global and U.S. economies, there’s still an opportunity for businesses and individuals to thrive in this environment. Businesses and consumers need to take a good, hard look at how they’re spending (and saving) and recalibrate their behavior to meet the economic pressures.

It’s important to remember that economic swings are part of the regular waxing and waning of the global machinery, and while we are facing tremendous inflation, it’s not the end of the world. In fact, many economists point out that in sectors like the housing market, we’ve never seen such a period of wealth-building in all of history. While we are looking at historic highs for inflation, interest rates still pale in comparison to the 18% interest rates consumers faced on mortgages during the inflationary period in the 1970s and 1980s.

It’s safe to say that it’s likely consumer spending will change in Q4 2022 as people respond to the economic pressures around them. The Fed is working hard to get inflation in check, which will affect how consumers behave. One of the critical steps you can take to protect yourself against a swing in consumer spending and sentiment is understanding where we are right now and the potential paths forward. As Warren Buffett, the Oracle of Omaha, is fond of saying, “Be fearful when others are greedy and greedy when others are fearful.” There is opportunity if you just look in the right places for it.