US consumers pause spending as omicron curbs appetite for food services, retail

U.S. consumers are less likely to spend their savings in the coming months, preferring to wait out the surging omicron variant, inflation and supply-chain problems.

Retail and food services sales fell 1.9% in December 2021 from the previous month, according to the U.S. Census Bureau. That missed economists' consensus expectations for a 0.0% change in retail sales from the prior month. The month-over-month dip may signal a pause in consumer spending that lasts until the second half of the year.

"Higher inflation, supply chain issues, as well as the continued spread of omicron and other future, new COVID variants could pull back spending in the coming months," said Lauren Henderson, economic analyst at Stifel.

Consumer spending had been steadily increasing since March 2021 as the rollout of COVID-19 vaccines prompted consumers to start shopping, traveling and dining out again. The rise continued when people began holiday shopping early as supply-chain issues threatened how much would be in stock. Inflation also contributed to higher spending and ate into savings.

Pulling back

The personal savings stockpile has dwindled as the rate dipped from earlier in the pandemic when consumers benefited from federal stimulus money and extra unemployment benefits, according to Stifel's Henderson.

However, consumers are feeling hesitant to spend as the omicron variant causes COVID-19 cases to spike throughout the country.

"Right now it looks like the consumer is taking a short-term pause," said Oren Klachkin, lead U.S. economist with forecasting and analytics group Oxford Economics. "Our real-time, high frequency recovery trackers show that spending is taking a hit from the omicron infection wave."

Hotel occupancy, restaurant bookings and recreational spending are taking a hit as consumers exhibit more caution, Klachkin said.

Retail sales in December 2021 missed consensus expectations as product shortages, inflation and the omicron variant impacted consumers, leading to the first month-over-month decline in retail sales since July 2021.

The omicron variant "will drag on consumers' willingness to spend" in the first quarter of 2022, according to Klachkin.

Inflation is also running well above wage gains, according to Joel Naroff, president of Naroff Economics.

"Disposable income was off sharply over the year, and unless businesses are willing to keep bidding up wages rapidly, it will likely fall again this year," he said in a Jan. 29 note. "It's hard for consumption to expand when spending power is contracting."

Picking up

Consumers are expected to spend their savings more readily later in the year as the combination of strong labor income growth, elevated excess savings, and healthy balance sheets will support consumption growth of about 4% in 2022, according to Oxford Economics' Klachkin.

"The spending burst will be strongest from high-income households since they're the ones that have saved the most during the pandemic," he said.

The consumer is expected to remain strong in 2022 but at less than half the pace reported in early 2021, said Stifel's Henderson. The prospect of higher wages and potential additional fiscal initiatives will help boost the consumer, she said.

As consumers once again become more comfortable interacting in crowds — including movie theaters, malls, restaurants and concert venues — these industries will see increased spending, Henderson said.

The demand for goods will also be steady as some consumers shift their preference from services, she said.