Economist: 'Consumer is still out there spending' despite slowing growth, inflation

Mastercard Chief U.S. Economist Michelle Meyer joins Yahoo Finance Live to discuss inflation, consumer spending, U.S. retail sales, inventory, macro headwinds, and the outlook for Fed policy.

Video Transcript

BRIAN SOZZI: OK, there's a lot coming at the US consumer right now. Gas prices over $5 a gallon, food prices through the roof. Fears of a recession starting to take hold. Pull all this together, and we could be looking at a consumer spending pullback in the months ahead. Let's chat more about this with Mastercard's chief US economist and friend of the show, Michelle Meyer. Michelle, happy Friday to you. Look, as I just said-- and there's a lot the consumer is dealing with right now-- are we at that point where consumer spending could just fall off a cliff?

MICHELLE MEYER: Hey, Brian. Thanks for having me on. Always good to chat with you. Yes, the headwinds are blowing very strong right now. There's high inflation. There's high inflation in necessities-- food and energy, as you noted, and shelter. At the same time, the Fed is trying to fight that by hiking interest rates. So there are headwinds. We do need to pay close attention to it. And there are surveys that are suggesting that consumers are noticing as well.

That said, when you look at the actual data, when we look at Mastercard SpendingPulse data, the consumer is still out there spending. We actually saw an acceleration in the year over year growth rate in May, relative to the prior month, as consumers get ready for the back-to-school season. So there are challenges. We should expect a moderation looking ahead. But by no means are we seeing anything that resembles a collapse in spending here.

BRIAN SOZZI: Michelle, you've been doing this for a while. Are you surprised we haven't seen a sharper pullback?

MICHELLE MEYER: You know, I'm not, for a few reasons. The first is, look at the labor market, right? We still have very high job openings rates. We still have very strong job growth. The last jobs report showed 390,000 jobs were added across industries. The unemployment is very low. Wages are rising. So there is support in terms of that fundamentals in that people have jobs. They expect to continue to have jobs.

The other very, very important factor is that they have savings, right? This last year was one of extraordinary stimulus, monetary stimulus, fiscal stimulus. And that created a lot of cash on balance sheet. And those cash levels are still high. So people have the ability to use that to help to finance spending. So what we're seeing in kind of the simplest form is a reversal of that real excessive stimulus, right? We're seeing that pullback. We're seeing an attempt to rebalance the economy. And that does mean a moderation is going to come, but it doesn't mean that it has to be this abrupt change in the course of the economy.

BRAD SMITH: Michelle, do you believe that supply chain issues will be-- and these have made inventory levels extremely unpredictable for some retailers. Do you believe that they'll hold up to a necessary standard, or at least, the level, that will make it stable enough to meet some of these SpendingPulse goals and targets, at least, in forecasts of 7 and 1/2% growth during the back-to-school season?

MICHELLE MEYER: Yeah, so the supply side is critical. And I'm glad you brought that up because it's not just-- when you think about the economy, it's not just how much consumers want to buy. It's how much is available there. And this has been a major challenge in the past year to two years, is that supply chains were limited. They were broken for many items. And inventory levels fell to very low ratios. And as a result, prices increased dramatically.

The good news is that that's starting to be resolved for certain products. And in fact, you do hear some retailers that have had just in case inventories actually sitting on some decent stockpiles now. And in the end, that can maybe even lead to some disinflation, which would be really quite welcome, given the inflationary pressures that are out there. So I think that there is product available now, more so than certainly a year ago at this time.

Remember also that consumers have shifted their prioritization around spending. You are seeing a lot more experience-based spending-- travel, restaurants, lodging. And you're seeing the items that go along with that, so kind of occasion apparel, for example, where people want to buy certain items in order to experience life again and get back out there. So there's differences in the consumer wallet. The story is going to look very different, depending on what sector you're focused on.

BRAD SMITH: And Michelle, just a follow-up to that because as we're thinking about how the retailers themselves are kind of navigating this environment, the operating costs for the sales that retailers are banking on, they're vastly different than they were this time last year, in terms of the 2019 comps. And so all of that considered from your perspective, is there an outsized risk of some margin compression on their front if they have to discount at the same time that they are going into the back to school season, even in the holiday season?

MICHELLE MEYER: So I think the challenge for retailers right now is to be as nimble as possible in terms of responding to consumer demand. Retailers were [AUDIO OUT] everybody was caught off-guard, right, when the pandemic hit and people wanted to snap up-- snatch up as many goods as they could-- big ticket items, everything related to housing. And there was a major shortage. And we couldn't accommodate that demand.

And now that has changed, right, where there's a lot more spending related to leisure and, again, this kind of experience economy. So it's about being nimble. It's about being able to respond to these changes in consumer behavior and being able to realize where and how you can pass on costs. So the consumer is the pulse of the US economy. And trying to understand what's happening in real-time, I think, is critical.

BRIAN SOZZI: Michelle, do you think we are talking ourselves into a recession? Realistically, this weekend, President Biden's comments to the AP in his latest interview about recession and things slowing down, that's been played all over the place over the next few days. And if you see those headlines, maybe you're just less inclined to not go out there and buy a new shirt.

MICHELLE MEYER: Yeah, so I like the Google search chart you pulled up. I look at that myself, because I think it is important to just to understand kind of the buzz, right? What's the animal spirits out there? How concerned are people? Because when they hear about recession, they start to wonder. But at the same time, they're also looking at healthy income. They're looking at money out there. And they're still trying to resolve some of this pent-up demand that they've had for a long time.

So animal spirits matter. Behavioral economics is really important. So we do have to think about these sentiment changes and how people are perceiving the economic environment. But also, what they're getting in, right? Income in means a certain amount of spending out. So, to me, the recession story, I think it's smart to be thinking about these headwinds. I think it's smart to be thinking about the path of the economy looking forward. And a lot of these recession calls are about 12 to 18 months forward.

You know, I think it's hard to say a recession is around the corner. We're just not at all seeing that in the data. But to say that there could be some considerable risks into the future, absolutely. We should be thinking about that. You have a real pivot in the economy with the Fed hiking interest rates dramatically and trying to cool down the economy to rein in inflation. But we have to be careful with how we characterize these recession risks, in my view.

BRAD SMITH: Michelle, always great to get your insights and perspective. Mastercard's chief US economist Michelle Meyer, thanks so much.