2024 Global Digital Shopping index

Why Improved Consumer Sentiment May Not Translate Into Increased Spending

couple walking with shopping bag

The more sanguine consumers feel about the state of the world — particularly about the state of inflation — the more apt they are to spend.

That’s the shorthand logic, anyway. But even with the positive mindset logged in the most recent reading from the University of Michigan’s Surveys of Consumers, for January, there’s at least some evidence of some caution in the mix, and that optimism may not translate into increased activity at merchants’ (online and offline) registers and checkouts.

As reported last week, consumer sentiment has reached its highest level since July 2021, per the survey.

The overall index was up 13%. And with a bit more granularity, the tear-ahead inflation expectations eased to 2.9%, down from 3.1% in December and 4.5% in November. But 41% of consumers expect good times in the year ahead for business conditions, while 48% expect bad times ahead. And through sentiment has improved in recent months, it must be noted that even with the January boost, overall consumer sentiment is still 7% below the historical average since 1978.

Some Slowdown in Card-Related Spending

The payment networks show some moderation in spending through the first few weeks of the new year. As Mastercard CEO Michael Miebach said during the company’s latest earnings report, though the labor market is strong with low unemployment and rising wages “some risks we’re monitoring include credit availability and delinquency rates. Second, while inflation continues to moderate, prices of many goods and services remain elevated.”

The company’s presentation materials show that switched volumes of transactions into the first few weeks of the year came in at 4% year over year, where that rate had been 5% during the fourth quarter, and 14% in the rest of the world, a slight downshift from the 15% seen in the fourth quarter.

And Visa’s management noted on the call that headed into the end of this past month that U.S. payment volumes were up 4% with debit up 3% and credit up 4% year on year. Those metrics are down from a respective 5% and 6% seen in the fourth quarter.

In both firms’ earnings calls, weather was called out as factor. But other data, as noted here, detailed that the personal savings rate was 3.7% in December, down from 4.1% in November. And debt payments are on the rise, too . Add in the fact that the Fed has just signaled, as of last week, that interest rate cuts may not be in the offing as soon as some observers might have hoped.

That means that variable rate debt, such as credit cards, will not “reset” (our terminology) at less onerous rates, and so the monthly obligation of carrying that debt will at least as expensive as it is now. The pressures are in place, there are some indications of a slowdown in the first few weeks of the year — and what remains to be seen is how long the pressures and the slowdown will last, and how it all will impact merchants.