Current data from Bank of America (BAC 0.76%) and Citigroup (C 0.57%) Show that consumer spending remains strong. Not only that, but consumers are saving money and still have account balances well above pre-pandemic levels.

Consumers have higher deposit balances, which can lead to “stickier” inflation, or higher inflation for longer periods of time. Here you need to know about the consumer situation and which sectors of the economy are being affected.

Fiscal stimulus boosted consumer deposits amid the pandemic

The growth of consumer deposits is amazing. During the pandemic, consumer account deposits increased as a result of massive fiscal and monetary stimulus. This deposit growth has given consumers a stronger balance sheet and more savings to absorb rising costs.

According to Bank of America, consumer deposits remain higher than before the pandemic. The bank does this by dividing its customers into groups and looking at how their savings have fallen.

One group CEO Brian Moynihan cited during the company’s earnings call this month was customers with account balances between $2,000 and $5,000 before the pandemic. In early 2020, the average account balance of these customers was $3,400. In 2022, the average account balance of this group of customers reached $13,400. Even with inflationary pressures, those customers’ account balances still average $12,800 — well above pre-pandemic levels.

The question arises as to whether consumers should spend or save these balances. Why is it different?

Service costs are still high: does this lead to “sticky” inflation?

Consumer spending trends are strong. For Bank of America, consumer spending was up 10% in 2022 from the previous year. However, consumer spending was more robust at 14% at the start of the year and was not as strong in the fourth quarter, when it was up 5%.

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What consumers are spending is also important. According to Moynihan, consumers are spending more money on services and experiences than they did a couple of years ago when spending on goods was strong. CEOs say these spending trends can keep the unemployment rate low.

However, Moynihan thinks inflationary pressures on service costs may continue. Because consumer account balances are strong and spending is being devoted to services, price increases and possibly wage increases in that sector may continue as companies scramble to fill positions.

According to data from the Bureau of Labor Statistics, the leisure and hospitality industries have lost more than 1.5 million jobs — well above pre-pandemic levels. Inflation can be “sticky” in the service sector and companies may need to raise wages to attract candidates to fill those jobs. A resilient job market has kept services inflation “painfully persistent”, according to Jane Fraser, Citigroup’s chief executive officer.

US Job Openings: Comfort and Hospitality Data by YCharts

Consumer savings can cushion the blow of a recession

Despite Recent layoffs At many large tech companies, the unemployment rate is still low at 3.5%. Because of this, Fraser sees the Federal Reserve raising interest rates and keeping them higher than the market expects. However, she says it’s an unusual market and “it It won’t be like a normal recession.”

Although consumers have withdrawn some of their deposits, these balances remain high. In a recession, consumers can dip into these built-in savings. However, the health of their balance sheets may make the downturn less severe than expected.

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As an investor, it is important to keep an eye on inflation and interest rates. Recent bank earnings reports suggest that sticky inflation could lead to higher interest rates. If spending remains strong in the services sector, this could keep inflationary pressures up, and the Fed could keep its foot on the brakes with higher interest rates for longer— This led to a recession sometime later this year.

This year may be another volatile year in the stock market. However, if the Fed’s actions eventually bring down inflation, it could pave the way for a more normal investment climate and another bull market in stock.

Bank of America is an advertising partner of The Motley Fool Company, The Ascent. Citigroup is the advertising partner of The Ascent, The Motley Fool Company. Courtney Carlson No position in any of the stocks mentioned. The Motley Fool has and recommends positions in Bank of America. There is the Motley Fool Disclosure Policy.

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