Consumers Tighten Their Belts Ahead of Holiday Season

Americans seem to be spending less ahead of the winter holidays, as indicated by a decline in October retail sales, data from the U.S. Commerce Department showed on Wednesday, which experts told Newsweek could be due to high borrowing costs and the restart of student loan repayments.

Retail sales fell by 0.1 percent last month to $705 billion, and adjusted for inflation the drop was 0.2 percent, the first such drop since March.

The decline was spread across items such as auto spending and housing items that included furniture and building materials.

The drop in spending showed that the high interest rate environment plus the resumption of student loans that kicked in September is starting to make consumers pause on the ways that they spend their cash.

The Federal Reserve, in their efforts to battle historic levels of inflation, hiked rates at their most aggressive clip since the 1980s to their current level of 5.25 to 5.5 percent which in turn pushed up borrowing costs for housing, cars and business investments.

"People are starting to change where they're spending," Meagan Schoenberger, a senior economist at KPMG, told Newsweek. "So, spending on big-ticket items like motor vehicles or housing-related items, so things that need to be financed, those are the hardest hit, whereas other areas are at least flat or doing a little better."

Consumers appear to be a little more careful in their spending than they were during the summer when they forked out cash for concerts, dinners out and travel, fueling economic growth of nearly 5 percent for the three months through September.

"The summer was a red hot pace for spending for the consumer. September was revised up to almost a full percent just in that month. So slow down in October is not necessarily that big of a surprise, especially with the resumption of student loan payments," Schoenberger said.

Over 26 million student borrowers for the first time since the pandemic began to pay back the debt, Schoenberger pointed out, beginning with interest payments in September and cash on the loans the following month. Some analysts suggest that could cost households about $200-300 a month, about 5 percent of the U.S. median salary.

Heading into next year, households will begin to feel the pinch of high interest rates, tight lending, depleted savings, and, for some a jump in debt on their pocketbooks, Nancy Vanden Houten, a lead U.S. economist at Oxford Economics, said in a note shared with Newsweek.

"Retail sales were not quite as weak as expected in October, but the report showed a fairly broad-based slowdown in spending. We expect consumer spending to slow significantly as the year winds down and in 2024," she said.

As the economy feels a pinch, some shoppers are finding creative ways of buying expensive products. For example, one TikToker is revealing a hack to get your hands on a Prada lookalike shoe for $50.

But Americans still stepped out for dinner, with data showing that spending on food services and drinking places was slightly up, perhaps taking advantage of the last vestiges of summer weather in October. But even that category showed a decline.

"Discretionary spending at restaurants increased by the smallest amount since March," Vanden Houten pointed out.

Consumers still spent online, particularly on electronics, and as cold weather started to permeate across the country, there was evidence that Americans were beginning to spend a bit more at pharmacies and drug stores.

"The exception here is electronics and also health and personal care stores because of the larger waves of respiratory illnesses that are popping up around right now," KPMG's Schoenberger told Newsweek.