Consumers in America have seen a puzzling trend in recent years. Despite complaining about the economy and prices, many of them are spending. American buyers will not be stopped—at least, not yet.
Consumers have held up economically. They want to spend their stimulus money and pandemic savings. Retail sales slowed in 2022 but recovered in January 2023. Many companies have raised prices to offset their own rising costs, but they’ve also taken advantage of the inflationary moment to raise prices and increase their profit margins to their highest level in decades—if everyone knows everything’s getting more expensive, it’s easier to get them to go along with rising costs. Several executives discussed the situation.
Yet, consumer pushback may be changing. Pandemic savings are diminishing, causing a rise in household debt. On February 22, Greg Daco, chief economist at EY-Parthenon, said that debt repayment would be “likely to reach and stay substantially greater than pre-pandemic levels – indicating a severe financial pressure on families and consumer spending capacity.”
Consumer financial balances are progressively eroding. Higher interest rates and leverage are increasing delinquency and debt service expenses. Daco shared that banks and financial organizations are also becoming more careful with loans. Thus the combination of all three things is dangerous for consumer spending.
Corporate America cannot ignore it. Companies may not be able to squeeze customers as much as they did a year ago. Consumers can’t always come along. They may cut down or trade-off.
Fighting pandemic cash is running out.
Many American consumers were prepared for inflation in 2021 and 2022. Stimulus checks, child tax credits, and increased unemployment insurance gave individuals extra money.
Once government stimulus ended and the economy stabilized, excess savings fell below $2 trillion in 2021. Personal savings have also fallen. As indicated, household debt reached a record $16.9 trillion in the fourth quarter of 2022, while missed debt payments rose. Consumers aren’t in danger, but their position has deteriorated. With a slowing economy, inflation and debt interest, rates are increasing.
Businesses may need to lower pricing.
Pricewise, consumers will reach a limit. People may switch to generic brands or purchase fewer or alternative goods. When apples are too pricey, people purchase oranges.
Companies were frank about the threshold customers wouldn’t cross last year, sometimes further than they expected.
In 2020 and 2021, inflation began to rise, but corporations didn’t pass it through until 2022. Inflation allowed them to. Pre-Covid, it was a lot tougher to transfer increased prices to the retailer and ultimately to the customer because there would be a lot of bargaining and conflict between the store and the food packaging companies. For the last two years, it was clear that everyone’s prices were rising exponentially.
2023 is different. Cost pressures are lessening.
Shoppers are more deliberate today than in the past. Due to supply chain issues being resolved, they’re more sensitive to marketing and reductions. Sales volumes are down, but not as much as many firms expected. He said most manufacturers expect sales to drop more this year. Although 2022 wasn’t as severe as predicted, the main concern is how much steeper the volume decrease will be in 2023.
As expenses are growing slower, companies can raise prices more slowly.
“Inflation and supply chains are improving, but price rises appear to be testing customers and whether they’ll accept it or not” Thomas added. “It seems more like a profit and margin play than a necessity.” Businesses that raise prices risk losing customers, which may be difficult to regain. They may prefer a generic brand after switching.
Low-income consumers will suffer most.
Despite how it seems, the economy is doing well. GDP is rising, jobs are plentiful, and people are spending. Yet not all customers will push back and cut down.
In his previous market comments, Daco believes a K-shaped spending pattern will happen in 2023, with low- and median-income families having to spend less and higher-income families spending more. “For lower-income families, their extra savings have evaporated, and they are increasingly tapping into their normal savings and utilizing credit to counteract inflation,” he wrote.
Again, everything is well. For the last several years, many employees, particularly low-wage workers, have seen their earnings rise, but not enough to keep up with inflation.
For months, the economy has had a sense of impending doom. The American economy is declining, regardless of recession. To limit inflation, that’s the aim. Yet, it may be lumpy and uncomfortable for some. As irritating as inflation has been, it’s been good for many people to participate and have the money to spend, particularly those who aren’t accustomed to it.
Despite this, many firms will succeed but customers may have greater power to fight back if they have no other alternative. If you believe your business could be on the bad end and might not make it through, find tips on “Saving Your Failing Business With These Simple Steps”.