Americans Are Still Spending Like There’s No Tomorrow
Concerts, trips and designer handbags are taking priority over saving for a home or rainy day
Concerts, trips and designer handbags are taking priority over saving for a home or rainy day
Consumers should be spending less by now.
Interest rates are up. Inflation remains high. Pandemic savings have shrunk. And the labour market is cooling.
Yet household spending, the primary driver of the nation’s economic growth, remains robust. Americans spent 5.8% more in August than a year earlier, well outstripping less than 4% inflation. And the experience economy boomed this summer, with Delta Air Lines reporting record revenue in the second quarter and Ticketmaster selling over 295 million event tickets in the first six months of 2023, up nearly 18% year-over-year.
Economists and financial advisers say consumers putting short-term needs and goals above long-term ones is normal. Still, this moment is different, they say.
A tough housing market has more consumers writing off something they’d historically save for, while the pandemic showed the instability of any long-term plans related to health, work or day-to-day life. So, they are spending on once-in-a-lifetime experiences because they worry they may not be able to do them later.
“It’s not a regret-filled, spur-of-the-moment decision,” says Michael Liersch, who oversees a team of advisers as head of advice at Wells Fargo. “It’s the opposite of that, where I would regret not having done it.”
Liersch cautions that it’s too soon to say whether the spate of spending is a fleeting moment or a new normal. And consumers remain frustrated about inflation as the price of many goods remains significantly higher than a few years ago.
Ibby Hussain, who works in marketing for a financial communications firm, says the Brooklyn, N.Y., apartment he and his fiancée rent for $3,000 a month would cost a million dollars to buy. At current rates, that means around $5,000 a month after a $200,000 down payment, not including property taxes. “And it’s not even that nice of an apartment.”
So, instead of saving for a down payment like he expected to after turning 30 and getting engaged in the past year, he splurged.
First, he bought a $1,600 Taylor Swift Eras Tour ticket and then he spent $3,500 on a bachelor party trip to Ibiza, Spain.
“I might as well just enjoy what I have now,” he says.
Ally Bank, whose online platform started allowing customers to create savings buckets for different goals in 2020, says users create about one-and-a-half times more experience-oriented buckets such as travel and “fun funds” versus those associated with longer-term planning.
Lindsey and Darrell Bradshaw went into credit-card debt to finance a vacation to Maui this past spring. The couple booked the trip only a few weeks after Lindsey, 37, quit her job to be a full-time caregiver to their 8-year-old son, who has special needs.
“We did not have the money and we were like, ‘Let’s just do this anyway,’ ” says Darrell Bradshaw, a 39-year-old general contractor in Seattle.
The trip cost about $10,000, including three, $1,000 last-minute plane tickets, 10 nights at a $385-a-night 4-star resort and several elaborate meals.
Even though the family decided to cancel subscriptions and cut back on dining out to help offset the bill, they say they have no regrets—especially since they got to see Lahaina just a few months before it was decimated by deadly wildfires.
Fears about a changing climate are driving some people to try to see places before they’re gone. In a monthly Deloitte survey of 19,000 global consumers, climate change was the only topic among 19 different concerns that respondents reported feeling significantly more worried about over the past year.
Josh Richner says he greatly lowered his retirement contribution to afford a cross-country trip that included a $7,000 Alaskan cruise so his family could see the ice caps, which have been melting at a rapid clip.
“I’ve never spent that much on a trip before,” says the 35-year-old, who says the splurge was also motivated by the pandemic and a health scare.
About six months ago, Richner and his wife decided to sell their Columbus, Ohio, home to travel the country with their two young children. Working for National Legal Center, a law firm that helps consumers resolve debt, he knows the potential consequences of living in a way that gives priority to the present. But he isn’t worried.
“I just hit a point where the thing that we had been talking about maybe hopefully doing some day, we’re going to do it now,” he says. “I’m not going to worry about money anymore. I don’t have it in me.”
Consumers might not be able to keep splurging forever. Labour strikes and student loan repayments could both lead people to pull back. Rising gas prices could also deter travel.
For those who study spending, however, the robustness up to this point has been a surprise.
In the New York Federal Reserve Bank’s August SCE Household Spending Survey, households reported spending 5.5% more than last year. The share of households that said they made at least one large purchase in the previous four months increased to 64% from 57%, its highest reading since August 2015.
“Normally at a time when you have higher inflation, but also higher interest rates, you don’t expect spending to hold up so well,” says Wilbert van der Klaauw, an economic research adviser on household and public policy at the Fed.
Rather than funnel all their spare change into a house or retirement account, Candice and Jasmine Kelly started a bucket-list fund after attending back-to-back funerals a few months ago. The couple adds a few hundred dollars from their paychecks each month into the fund, which they have used to try fancy restaurant tasting menus and buy Jasmine her dream designer handbag.
Instead of waiting to have fun when they retire, Candice, a 26-year-old management analyst in Charlotte, N.C., says the couple is trying to do the opposite. They want to enjoy their money while they’re young—even if it means working longer.
“All the rules that exist around money and lifestyle are just things people made up, so we’re playing a different game, and honestly I think we’re having more fun,” says Candice.
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When will Berkshire Hathaway stop selling Bank of America stock?
Berkshire began liquidating its big stake in the banking company in mid-July—and has already unloaded about 15% of its interest. The selling has been fairly aggressive and has totaled about $6 billion. (Berkshire still holds 883 million shares, an 11.3% interest worth $35 billion based on its most recent filing on Aug. 30.)
The selling has prompted speculation about when CEO Warren Buffett, who oversees Berkshire’s $300 billion equity portfolio, will stop. The sales have depressed Bank of America stock, which has underperformed peers since Berkshire began its sell program. The stock closed down 0.9% Thursday at $40.14.
It’s possible that Berkshire will stop selling when the stake drops to 700 million shares. Taxes and history would be the reasons why.
Berkshire accumulated its Bank of America stake in two stages—and at vastly different prices. Berkshire’s initial stake came in 2017 , when it swapped $5 billion of Bank of America preferred stock for 700 million shares of common stock via warrants it received as part of the original preferred investment in 2011.
Berkshire got a sweet deal in that 2011 transaction. At the time, Bank of America was looking for a Buffett imprimatur—and the bank’s stock price was weak and under $10 a share.
Berkshire paid about $7 a share for that initial stake of 700 million common shares. The rest of the Berkshire stake, more than 300 million shares, was mostly purchased in 2018 at around $30 a share.
With Bank of America stock currently trading around $40, Berkshire faces a high tax burden from selling shares from the original stake of 700 million shares, given the low cost basis, and a much lighter tax hit from unloading the rest. Berkshire is subject to corporate taxes—an estimated 25% including local taxes—on gains on any sales of stock. The tax bite is stark.
Berkshire might own $2 to $3 a share in taxes on sales of high-cost stock and $8 a share on low-cost stock purchased for $7 a share.
New York tax expert Robert Willens says corporations, like individuals, can specify the particular lots when they sell stock with multiple cost levels.
“If stock is held in the custody of a broker, an adequate identification is made if the taxpayer specifies to the broker having custody of the stock the particular stock to be sold and, within a reasonable time thereafter, confirmation of such specification is set forth in a written document from the broker,” Willens told Barron’s in an email.
He assumes that Berkshire will identify the high-cost Bank of America stock for the recent sales to minimize its tax liability.
If sellers don’t specify, they generally are subject to “first in, first out,” or FIFO, accounting, meaning that the stock bought first would be subject to any tax on gains.
Buffett tends to be tax-averse—and that may prompt him to keep the original stake of 700 million shares. He could also mull any loyalty he may feel toward Bank of America CEO Brian Moynihan , whom Buffett has praised in the past.
Another reason for Berkshire to hold Bank of America is that it’s the company’s only big equity holding among traditional banks after selling shares of U.S. Bancorp , Bank of New York Mellon , JPMorgan Chase , and Wells Fargo in recent years.
Buffett, however, often eliminates stock holdings after he begins selling them down, as he did with the other bank stocks. Berkshire does retain a smaller stake of about $3 billion in Citigroup.
There could be a new filing on sales of Bank of America stock by Berkshire on Thursday evening. It has been three business days since the last one.
Berkshire must file within two business days of any sales of Bank of America stock since it owns more than 10%. The conglomerate will need to get its stake under about 777 million shares, about 100 million below the current level, before it can avoid the two-day filing rule.
It should be said that taxes haven’t deterred Buffett from selling over half of Berkshire’s stake in Apple this year—an estimated $85 billion or more of stock. Barron’s has estimated that Berkshire may owe $15 billion on the bulk of the sales that occurred in the second quarter.
Berkshire now holds 400 million shares of Apple and Barron’s has argued that Buffett may be finished reducing the Apple stake at that round number, which is the same number of shares that Berkshire has held in Coca-Cola for more than two decades.
Buffett may like round numbers—and 700 million could be just the right figure for Bank of America.
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