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Why Americans keep splurging even as they turn sour on the economy

A man hands over a credit card at a store register.
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US consumer confidence data for July, which was released Tuesday, showed a third straight month of decline. The Conference Board, which runs the monthly surveys, reiterated that it expects strong headwinds for consumer spending in the next six months, echoing what analysts have been saying since the start of the year—that people are going to tighten their belts.

However, consumers have yet to actually do so. US retail sales increased 1% in June, the latest figures available, with nine out of the 13 tracked retail categories increasing last month.

And while there’s talk of an impending recession, the typical behaviors that mark a weakening economy are not showing up yet. People usually shift by cutting down on durable goods and travel. But this summer is one of the first opportunities many people have had to travel since the beginning of the pandemic, and spending on this category is as its highest since the onset of covid-19, even with airfares and hotel prices surging; the same goes for eating out with restaurants and live events, spurring increased spending.

A majority of Americans are living paycheck to paycheck—or are they?

A report last month said that 58% of Americans live paycheck to paycheck, including a third of those earning $250,000 or more. But the claims may be overstated, according to an analysis by Bank of America, and Americans have more of a financial cushion than these numbers indicate.

“Paycheck to paycheck has this subsistence level kind of feel to it,” said David Tinsley, a Bank of America Institute senior economist, who examined the aggregate data of nearly 67 million Bank of America clients. While people may be using up all their cash at the end of every pay cycle, a lot of that is spent on discretionary items, in other words expenses that are not housing, utilities, food, or gasoline.

In reality, Bank of America found that the share of people who were stretched financially—that is, had outflows that exceeded their inflows—in the first quarter of this year sat at roughly 20% across all income bands from low to high.

If it seems mystifying why high earners are burning through so much cash, Tinsley says it’s because as a demographic they tend to have greater financial commitments. They may have taken on a very large mortgage or pay for private school tuition for their children. A change in lifestyle would not be painless, but if push comes to shove, a family would be able to adjust.

But even those at the lowest tier of earnings as an average are more resilient than two years ago, the bank said. Savings are up around 8% overall compared to pre-pandemic, thanks to stimulus checks and reduced spending on socializing and going out through lockdown.

Rising credit card usage not necessarily a bad sign

The bank’s findings could also help allay fears over credit cards. In May, US credit card balances jumped $71 billion year over year to $841 billion in the first quarter, the Federal Reserve Bank of New York said. This led to talk that consumers were relying on credit cards to finance their spending, but Bank of America said the usage is driven primarily by higher-income households as they re-engage in services spending to reap credit card rewards, not because of financial difficulties.

The American job market is still strong

So what explains the gap between how people feel and what they actually do?

“The falling consumer confidence is mostly over inflation and that’s really unusual,” Tinsley said. “Confidence usually falls because people are worried ultimately about their jobs. Sentiment around the labor market hasn’t deteriorated much at all and because of that, they’re able to keep spending right now. At the lower end, workers in leisure and hospitality have been getting some 10% plus wage growth right now. There’s not a lot of hard evidence of that on the wane.”

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