US was banking on 'revenge spending' to keep economy afloat, but the demand is fading
- When pandemic-related restrictions lifted, people were ready to spend on experiences at any cost.
- That 'revenge spending' on travel and leisure has been carrying the economy.
- Now, data show high gas prices is taking a toll on services spending, which may hurt the economy..
“Revenge spending” – spending on experiences such as travel and restaurants despite the cost to make up for time lost during the pandemic – is showing signs of buckling as inflation pressures settle in, new data suggest.
Last month, as the national average for a gallon of regular unleaded gasoline reached a record high of $5.016, Bank of America saw in its monthly debit and credit card data the first decline in consumer spending on travel and restaurants since January. January was the peak of the omicron wave.
As consumer spending on goods waned, pent-up demand for services like travel and restaurants was expected to keep the economy afloat.
“Gas prices are starting to hurt,” Aditya Bhave, a Bank of America Securities U.S. and global economist, wrote in his report. “Leisure services spending has weakened, particularly among lower-income households.”
Slowdown is broadening out
A broad-based slowdown seems to be emerging.
After Walmart and Target warned in May of a faster-than-expected shift in consumer spending away from discretionary items like home goods and electronics to necessities like food, analysts knew changes were afoot. But no one seemed overly alarmed because the services spending remained strong.
Gasoline spending rose another 4% in June and is up 20% over the past five months, which is taking a toll on spending, including services, especially among lower-income households (less than $50,000 annually). Bank of America estimates that month-over-month June spending on airlines dropped 2.3%, and for restaurants slipped 0.4%.
Durable goods spending dropped for the fourth consecutive month, the bank said.
Is there a silver lining?
Whether there's a silver lining depends on whom you ask.
Bank of America card data hasn’t shown much evidence that lower-income households are being forced to spend more on their credit cards because of inflation.
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“While credit card spending has modestly outpaced debit card spending for lower-income cohorts over the last year, debit card spending has grown much more relative to pre-pandemic levels,” Bhave said.
Credit card spending for every income group is up only slightly since the end of last year, and remains below pre-pandemic levels, except for the very top income group, he noted.
Whether that holds has yet to be seen. Research firm Morning Consult, whose high-frequency surveys first detected a decline in services spending in May, said it's seeing a rise in credit card balances.
In May, “the share of adults carrying credit card balances climbed 5 percentage points compared with a year ago, as inflation eroded purchasing power and incomes could no longer stretch as far as they once did,” the firm said in its consumer spending survey of 1,000 adults at the end of June.
Further, lower-income adults increased their credit usage more than the national average over the past year, the firm said.
Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at firstname.lastname@example.org and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.