Consumer Expectations for Spending Jumps to 4-Year High

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A measure of U.S. consumer interest in spending rose to its highest level in more than four years in November, even as expectations for household income didn’t change, the latest survey from the Federal Reserve showed.

When asked about their plans over the next year, households surveyed by the Federal Reserve Bank of New York in November said they would increase spending by a median of 3.7%—the most since July 2016 and up from 3.1% in October, the New York Fed said Monday. Meanwhile, expected growth in household income was a median 2.1%, virtually unchanged from October and lagging the 2019 average of 2.8%.

A jump in consumer spending would likely stem from pent-up demand, feel-good spending, and general belief the economy will improve as a COVID-19 vaccine rolls out across the country, according to Jennifer Lee, senior economist at BMO Capital Markets Economics. Even though expectations for income growth haven’t changed, many households built up a savings this year that’s still well above pre-pandemic levels.

“Given that the savings rate, though off the highs, is still elevated, consumers will be well-positioned to increase spending,” Lee said. “In 2021, assuming the vaccine will be widely distributed and effective, consumers will be chomping at the bit to spend on services, particularly travel and dining out, just to feel normal again.”

The U.S. personal savings rate was a lofty 13.6% of disposable income in October, nearly double the 7.2% one year prior, but still well below the 33.7% in April, when pandemic lockdowns were pervasive, according to the latest government figures.

Lee forecasts real gross domestic product (GDP) will grow about 4% in 2021, led by a strong 4.8% rebound in overall consumer spending. Besides having savings to draw on, consumers may be tempted by low borrowing costs, since the Federal Reserve Board is expected to keep its benchmark interest rate between 0% and 0.25% for a while, she said.