Americans' Post-Pandemic Spending Spree Faces Reality Check

Americans Curb Pandemic-Era Spending: What It Means for the Economy

by Faruk Imamovic
Americans' Post-Pandemic Spending Spree Faces Reality Check
© Getty Images/Joe Raedle

As the dust settled from pandemic lockdowns, Americans found themselves in an unusual financial situation. With better jobs, extra spending money, and a newfound desire to live life to the fullest, consumers splurged on the experiences and goods they missed during isolation. This trend, popularly known as the YOLO (You Only Live Once) economy, saw people spending freely on travel, dining, and luxury items in what some called "revenge spending."

“Covid showed all of us that life doesn’t go on forever,” said Sameer Samana, senior global market strategist at the Wells Fargo Investment Institute. “Preparing for a retirement that’s way off into the future and could be interrupted by something like a global pandemic changed our mindsets. People wanted to live in the moment.”

However, five years after the pandemic began, the exuberant spending spree is showing signs of slowing down. This shift could have significant implications for the U.S. economy.

The Shift in Consumer Behavior

Consumer spending, which buoyed the U.S. economy during the high-inflation years post-pandemic, is now stabilizing. Even the wealthiest Americans are opting for discount retailers like Walmart. Target has had to slash prices to attract hesitant shoppers, and iconic brands like Starbucks report stagnating sales, as luxuries such as Frappuccinos no longer seem indispensable.

Several factors contribute to this shift. Inflation remains high, and many consumers are depleting their pandemic-era savings. The job market is tightening, causing anxiety about job security. Additionally, the initial post-pandemic desire to indulge has waned, prompting a return to more prudent spending habits.

“There is an element of ‘how long can I live in this PTSD post-Covid environment?’” Samana explained. “At some point you do have to figure out what the new normal looks like. Employers want workers back more often in the office and in certain locations, you can’t work from anywhere anymore, that’s also changing mindsets. There’s this sense of reversion to the mean.”

Nevertheless, some areas of consumer spending remain robust. People are still willing to pay for experiences like Taylor Swift concerts and plane tickets. The TSA reported record-breaking Memorial Day travel numbers. Yet, these splurges come at the expense of everyday discretionary spending, as consumers look to economize on daily necessities.

Economic Implications of the Spending Decline

The decline in consumer spending could pose a risk to the U.S. economy. Spending drives approximately 70% of the country's Gross Domestic Product (GDP), making it a critical indicator of economic health. If this slowdown persists, it could potentially trigger a recession—a concern economists have voiced since 2021. However, most economists from major banks and firms do not foresee an immediate recession, suggesting that any slowdown might not be universal.

Market reactions have been noticeable. The Dow Jones Industrial Average dropped over 1,000 points between Tuesday and Thursday of last week due to unexpected economic data. A subsequent report showing a slight contraction in the manufacturing sector led to another 115-point drop on Monday.

“There’s really no indication that all of the factors weighing on the consumers’ mind are going to ease up anytime soon,” Samana noted.

The upcoming weeks will be crucial for investors, consumers, and economic analysts. The release of May's official jobs data will be scrutinized for signs of a loosening labor market. Additionally, the Federal Reserve's upcoming policy meeting will provide insights into the future of employment, inflation, and interest rates. While significant changes in interest rates are unlikely, Fed Chair Jerome Powell's guidance will be closely watched.

NYSEs Technical Glitch Sparks Confusion
NYSEs Technical Glitch Sparks Confusion© Getty Images/Michael M. Santiago

NYSE's Technical Glitch Sparks Confusion

On Monday, the New York Stock Exchange (NYSE) experienced a technical issue that halted trading for several major stocks, causing confusion and significant temporary valuation discrepancies. Berkshire Hathaway, for example, appeared to lose 99.97% of its value before the issue was resolved.

The NYSE attributed the glitch to a “technical issue” with industry-wide price bands managed by the Consolidated Tape Association (CTA). This issue caused numerous stocks to trade outside their normal limits, leading to trading halts. Despite the swift resolution and the cancellation of erroneous trades, the incident left many market participants uneasy.

Joe Saluzzi, co-founder of Themis Trading, expressed skepticism about the NYSE’s explanation, stating, “I’m not buying that explanation. That doesn’t make any sense to me.”

The Meme Stock Phenomenon Reignites

Meanwhile, the phenomenon of meme stocks has resurfaced with GameStop leading the charge. Shares of the video game retailer surged 21% on Monday following a Reddit post by influencer Keith Gill, known as “Roaring Kitty.” Gill revealed a $116 million investment in GameStop, which sent the stock soaring by as much as 75% earlier in the day before settling.

Gill’s post marked his return to Reddit after a three-year hiatus, during which the initial meme stock frenzy unfolded. These stocks, which gain value based on social media popularity rather than traditional financial metrics, continue to captivate retail investors. The resurgence extends to other meme stocks like AMC Entertainment, which saw nearly a 13% rise in trading.

In 2021, during the height of the meme stock mania, Gill testified before Congress, portraying himself as a casual trader who believed in GameStop's potential. This phenomenon highlights the ongoing influence of social media on market dynamics, often leading to volatile and unpredictable stock movements.