A few months into this year, the state of the US economy continues to be in great flux. Although inflation rates are lower than this time last year, they still remain high, more than twice the Federal Reserve’s target. Federal Reserve officials have raised interest rates over the past year, and are signaling that more increases are still to come. And while layoffs dominate headlines, the US unemployment rate remains low, at 3.5 percent as of March 2023, and the labor market remains very tight.
It’s no wonder, then, that as the US economy continues to send mixed signals, consumers are doing the same. According to the results of our latest US Consumer Pulse Survey, they’re worried about rising prices and job security, yet they’re optimistic and still spending. They’re switching to less expensive brands to save money, but they’re also willing to splurge on certain goods and services. And three years since the onset of COVID-19, some prepandemic shopping habits have returned with a vengeance, yet other new pandemic-induced changes in spending seem here to stay. The picture can be perplexing. Cecilia Rouse, who served as Chair of the White House Council of Economic Advisors until the end of March 2023, recently told the New York Times, “Sometimes I, in this course of the last few years, wished my PhD was in psychology,” instead of in economics.1
Our latest research lifts the lid on some of these dichotomies and complexities of US consumer sentiment and behavior. It’s now clear that while consumers increased their spending by double digits from mid-2021 through mid-2022, spending growth has begun to decelerate since late 2022. And while many consumers can spend given their strong balance sheets, they are more selective about what they do spend on. The picture continues to evolve. That means companies should not overgeneralize when it comes to examining consumer behavior. Instead, they can tease out nuances and seeming contradictions between sentiment and behavior, seek to better understand different types of consumers by generation and income level, and focus on improving the omnichannel experience for consumers.
Since the COVID-19 pandemic began, we have regularly polled US consumers about their spending habits and opinions. Our latest Consumer Pulse Survey was in the field from February 24 to March 1, 2023, and included responses from 3,973 adults in the United States (sampled and weighted to match the general US population). As we’ve done in the past, we combined the survey results with third-party data on consumer spending for our analysis. The following seven charts are highlights from this research.
Working-age consumers are concerned about employment. Although many high-profile companies are trimming their workforces, there are overall more job openings than before the pandemic. Likewise, even though the participation rate in the labor force dropped due to COVID-19, unemployment rates are lower than before the pandemic. And many consumers who left the workforce during the Great Resignation are now looking to rejoin it. According to the results of a survey we conducted in February 2023 of about two thousand consumers, 52 percent of 25- to 64-year-olds who quit their jobs during the pandemic and remain unemployed plan to seek work this year. Some want to find employment because of the increasing inflation-induced cost of living. Others want to work because there’s been a change in their personal circumstances, such as having more capacity to work because their kids have more consistently been back in school as COVID-19 levels have remained low.
Meanwhile, our Consumer Pulse Survey results show that younger consumers are fretting about job security, with 74 percent of Gen Z and 62 percent of millennials worried about employment. Just over half of Gen X feels the same way. Unsurprisingly, baby boomers, most of whom are likely retired and unlikely to reenter the workforce, are not that concerned.
Despite continued concerns about inflation, consumer optimism has improved since last summer’s low. Two-thirds of our survey respondents said inflation was one of their top three worries, similar to what they said last summer. But now more people are fretting over climate change and sustainability: 26 percent now compared with 19 percent last summer.
Nevertheless, consumer confidence in general has bounced back, with 27 percent more people feeling optimistic than last summer. Consistent with previous trends, younger and higher-income people are feeling the most hopeful. Although Gen Z is the cohort that’s most worried about employment, they’re also the most optimistic, with 46 percent expecting the economy to rebound in two to three months, compared with only 22 percent of baby boomers who feel the same way.
Driven by optimism, consumers are still spending, but cautiously. Conventional wisdom holds that consumers get skittish and pull back on spending if they fear a recession coming. But respondents to our survey have continued to spend, despite economic headwinds. Household balance sheets remain strong, especially for higher-income consumers, so they have the capacity to spend. However, unlike mid-2021 when consumers had more money in their wallets and we saw spending grow, they are now of two minds.
On one hand, consumers say they are concerned about inflation and are trading down—that is, forgoing a more expensive brand or store for a cheaper one or changing the quantity of what they buy to get the cheapest price. Consistent with that, their spending on goods decelerated when looked at in real dollars (adjusted for inflation). However, likely because of their strong balance sheets, consumer spending is still higher than it was before the pandemic, even when adjusted for inflation.
It’s a different story with services. Consumer spending on services fell in 2020 as people locked down and spent their money on home goods instead. However, the homebody economy began to shift in mid-2021 as COVID-19 restrictions lifted and consumers began to venture out more freely. As COVID-19 has faded from the forefront of consumer concern, there has been a steady increase in the volume of services consumers utilize, and spending levels have increased beyond those of 2019 (in real terms).
Consumers are trading down, looking for savings. Even though consumers are still spending, they’re seeking value. Eighty percent of our survey respondents said they’re changing their shopping behavior by trading down, compared with 74 percent of respondents when we last asked them in July 2022.
Consumers are most frequently making changes in shopping behavior by altering the quantity or pack size of what they purchase or switching retailers to find lower costs. These trade downs are leading to growth in wholesale club and convenience store channels, where the spending CAGR is two or three times greater than other channels such as drugstores, grocery stores, or mass-market big-box stores. Similarly, consumers are spending more on private-label goods: according to Nielsen data, private labels’ share of year-over-year sales growth among all consumer packaged goods grew from roughly 15 percent at the end of 2021 to 30 percent at the end of 2022.
A spending dichotomy has emerged, with consumers showing a willingness to splurge even while they’re trading down. Although inflation rates have increased over the past couple of years, respondents to our survey have shown a consistent willingness to treat themselves, with 40 percent saying they’re eager to spend in the coming year.
Younger and higher-income consumers, who also are the most optimistic about the economy, are more willing to open their wallets than other age or income groups. While 88 percent of Gen Z respondents are trading down, 64 percent of them are splurging. Gen Z and millennials show a particular willingness to splurge on fashion, with 61 percent of both age groups saying they intend to treat themselves by buying apparel, footwear, and accessories. Groceries and restaurants are popular splurge categories across all age groups.
People are no longer ‘pandemic nesting,’ and several types of spending have seen a full rebound. If 2022 was a year when consumers began to venture outside the home more often after emerging from pandemic lockdowns, then 2023 appears to be a year for going out in full force. The homebody economy is softening, and people of all income levels are heading out more to eat in restaurants and spend on entertainment outside the home. Looking at year-over-year spending, adjusted for inflation, it becomes clear that people aren’t purchasing as many household goods. Higher-income consumers, in particular, are spending 8 percent less than they were the year before on items for their homes.
While spending on some previously pandemic-accelerated categories, such as home and pet supplies, has slowed down, there are a few categories that have seen acceleration throughout the pandemic, even when adjusted for inflation. Cosmetics stores and sports apparel and outdoor stores have both seen accelerated sales growth since the summer of 2020. The trends these categories represent—the easy splurge on new cosmetics and the increased prevalence of athleisure dressing—are proving persistent.
In addition, we see continued growth in out-of-home and services-related categories. Consumers continue to ramp up on travel, embracing opportunities to reconnect with distant family and friends. Travel continues to be one of the fastest-growing spend areas year over year, at 6 percent even when adjusted for inflation, and is one of the top categories that consumers—especially older and higher-income consumers—plan to splurge on. In addition, we have seen a surge in out-of-home entertainment, at 7 percent year-over-year growth in real dollars. This same level of growth is reflected in the fitness industry, as consumers head back into gyms.
Consumers want to buy everything, everywhere, all at once. Many companies are focused on where consumers make their ultimate purchases. When COVID-19 broke out and physical stores closed up shop, e-commerce spiked. E-commerce has stayed largely consistent over the past three years, with credit card data showing e-commerce penetration at around 25 percent in most months and going up by three or four percentage points for the duration of each holiday shopping season. This is up from the 20 percent penetration we saw before COVID-19.
However, another trend has emerged from the pandemic and has only strengthened over time: consumers are shopping in an omnichannel way across the length of their purchasing journeys. Eighty-one percent of all consumers (six percentage points higher than last year) now choose to research and browse across multiple channels before making their purchase—whether it be on a web browser, in a brick-and-mortar store, or through an app—for a single transaction. And it’s not just younger consumers embracing omnichannel shopping. Eighty percent of Gen X and 77 percent of baby boomers are doing it too. Omnichannel retail is flourishing across all consumer categories, but it is especially popular for discretionary spend, such as toys or home decor, where 70 percent of consumers have an integrated shopping experience.
Given the continued uncertainty in the economy, and how consumers are responding with their own mixed signals, we believe companies can remain nimble and ready to flex when opportunities arise by doing the following:
- Find pockets of optimism and be ready to deliver where consumers want to splurge.
- Personalize experiences and offers to inspire purchases.
- Define what “value” means to consumers as they continue to trade down.
- Further strengthen omnichannel capabilities across both digital and brick-and-mortar shopping experiences.
- Expand or invest more in high-growth categories and channels against the backdrop of uneven growth across products and services.
- Build real-time consumer and market insights into your operating model to make the best growth decisions and deliver the right experiences.
