Consumer Spending Slowed in November

Overall, consumers remain in solid shape. Low unemployment, substantial savings and briskly rising wages are giving Americans money to spend. Consumers felt more optimistic about the economy in early December, heading into the last weeks of the holiday season, according to the Conference Board, a private research group.

“We are still on track for very strong fourth-quarter consumption, but I am now seeing that that momentum continues to fade,” said Aneta Markowska, chief economist at Jefferies LLC.

Ms. Markowska and other economists expect the highly contagious Omicron variant of the Covid-19 virus to be a temporary drag on economic growth. Some economists are lowering their growth projections for early 2022 due to growing concerns about the latest surge in cases. Economists at forecasting-firm Oxford Economics expect U.S. gross domestic product to grow at a 2.5% annual rate in the first quarter, down from a previous estimate of 3.4% growth.

Much of this output could be delayed, rather than lost altogether. Economists at Nomura lowered GDP forecasts for the current quarter and the first quarter of 2022, in part reflecting forecasts for weaker consumer spending tied to Omicron. However, they expect growth to pick up in the second half of next year as Omicron-induced supply-chain disruptions ease and inventory investment that was pushed back materializes.

Though each wave of rising Covid-19 cases appears to be less detrimental to the economy than the one before it, some economists say that Omicron poses different threats.

For instance, Omicron is hitting the Northeast harder than other recent virus surges. Businesses in the region tend to be more willing to impose their own restrictions to curtail the virus than some other areas of the country, said Ms. Markowska of Jefferies. For example, in New York City, some of the most popular Broadway shows, including “Hamilton” and “The Lion King,” have canceled performances through Christmas.

The economy is also further into the reopening process than earlier in the pandemic, meaning Omicron has the potential to reverse reopenings rather than just delay them, Ms. Markowska said. She noted that office occupancy might decline due to Omicron’s spread, which could damp demand for services such as cafeterias.

CNN President Jeff Zucker on Saturday told staffers the network was closing its offices with the exception of those who need to be there to perform their jobs.

Omicron is also keeping some sick workers at home for a period. This sort of dynamic could further restrain factories’ ability to pump out goods. Product shortages have been a major impediment to consumers’ ability to spend.

“It’s not that there’s a lack of demand for goods; in fact, that’s been one of the big surprises of 2021,” said Andrew Hollenhorst, chief U.S. economist at Citigroup Inc. “It goes back to the supply chain. You just cannot source these goods.”

A dearth of available goods could drive inflation higher. Inflation is at a 39-year high, meaning consumers face higher costs for gifts, appliances and accessories. So far, fast-rising costs don’t appear to be derailing consumers’ appetite to spend, though some individuals are concerned about the longer-term outlook for inflation.

David Esguerra, a 35-year-old from Phoenix, said he has seen prices rise rapidly. Pet-grooming services—including a bath and nail trimming—for his terrier mix Sofie have shot up to about $80 from $60 last year. Croissants at the farmers market cost roughly $6 this year, up from $4 in 2020, he said.

The supply-chain engineer’s pay raise this year was below the rate of inflation. As a result, he has adjusted his spending habits. For instance, he sought out furniture on secondhand markets like Craigslist to outfit his new home, and he is cutting back on purchases of clothes, shoes and phone accessories.

Mr. Esguerra isn’t overly concerned about his ability to afford daily necessities in the short term. He worries, though, about whether this bout of inflation will last. “My concern is more about long-term, how is this going to affect my financial future?” he said. “Is inflation going to stay high?”

Waning fiscal stimulus could also influence some contours of the economy’s growth path. After the pandemic hit in spring 2020, the federal government responded with expanded unemployment benefits of up to $600 a week, multiple rounds of stimulus checks and a boost in the 2021 child tax credit by as much as $1,600 per child.

Americans are now running through large piles of extra cash they accumulated as a result of government stimulus. Consumers were saving at an annualized rate of $1.322 trillion in October, compared with $5.764 trillion in March, when a fresh round of stimulus started reaching bank accounts.

As they deplete their savings, some workers might re-enter the labor force and help businesses fill job openings and meet production needs. With a much smaller share of worker incomes coming from government stimulus spending, wage growth will become a more important source of spending power in the coming months.

Write to Sarah Chaney Cambon at [email protected]