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Consumers spent more than expected in March, which is helping with economic recovery

ROB SCHMITZ, HOST:

The economy has been flashing a lot of mixed signals this week. Prices are up. GDP is down. The stock market has been zigzagging even more than usual. And the Federal Reserve is poised for what's expected to be a big jump in interest rates next week. NPR's Scott Horsley joins us now to try to make sense of all this. Hey, Scott.

SCOTT HORSLEY, BYLINE: Good afternoon.

SCHMITZ: Scott, there was a big headline this week saying the U.S. economy actually shrank in the first three months of this year. How worried should we be?

HORSLEY: Nobody likes to see GDP going backwards. Some commentators even dragged out that scary word from the 1970s, stagflation...

SCHMITZ: Oh, yeah.

HORSLEY: ...Meaning the worst of both worlds, high inflation and stagnant growth. But, you know, that's not really what we have today. We do have the high inflation, but there's nothing stagnant about the U.S. economy right now. The main driver of economic activity, consumer spending, is still quite strong. People are spending differently now. They're traveling more than they were earlier in the pandemic, for example. Peter Wright runs a boutique hotel in Tampa. And even though it's costing more for his guests to drive there, he says a lot of people are eager to make the trip.

PETER WRIGHT: They've been saving their money during the pandemic, and now they want to get away. And we see a lot of local staycations as well, people that were pent up. We see a lot of local people coming for a few nights and enjoying our restaurant and enjoying the pool. And they're looking to spend money.

HORSLEY: Consumer spending jumped 1.1% in March, which was more than many forecasters were expecting.

SCHMITZ: So, Scott, it sounds like people are not being turned off by higher prices.

HORSLEY: In most cases, no. Obviously, some customers are more sensitive to price hikes than others. McDonald's said this week that the price of Big Macs and French fries has gone up about 8% over the last year. And CFO Kevin Ozan says some people are downsizing their orders as a result but not very many.

KEVIN OZAN: Consumers are definitely worried about inflation. There's no doubt about that. They're concerned about energy and gas prices. And we are keeping certainly a close watch on lower-end consumers just to make sure that we're still providing the right value for our lower-end consumers.

HORSLEY: Ozan notes people might be a little more tolerant of rising restaurant prices because the prices at the supermarket have been going up even faster.

SCHMITZ: So the Federal Reserve says it's determined to get inflation under control. What is it doing?

HORSLEY: Fed policymakers are expected to approve another increase in interest rates next week. The Fed's been keeping a particularly close eye on wages. It's worried that if wages continue to climb at a rapid rate, that could force employers to raise prices even higher. We got a warning light this morning when the Commerce Department reported that wages rose 1.2% in the first three months of this year. That's not quite as fast as wages were going up last summer. But economist Sarah House of Wells Fargo says it's still a pretty big increase.

SARAH HOUSE: I think this shows that the heat remains turned up on compensation costs. And importantly for the Fed, that's a more persistent source of inflation that they have to deal with.

HORSLEY: And the bad news for workers is, even though wages are rising fast enough to alarm the Fed, they're not actually keeping pace with inflation. So the average worker is seeing her spending power eroded by these rising prices.

SCHMITZ: So let me get this straight. If wages are not keeping up with inflation, does that mean that this will ultimately go to put the brakes on spending?

HORSLEY: Well, it could, but we're not seeing that yet, at least not on a large scale. Keep in mind a lot of people saved money early in the pandemic when they couldn't travel or eat out very much. And, of course, the government was sending out those big relief payments. Bank of America CEO Brian Moynihan told Bloomberg a lot of that money is still sitting in people's bank accounts waiting to be spent.

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BRIAN MOYNIHAN: A consumer with $1,000 to $2,000 before the pandemic average in their account now has $7,000 in the account. All that says there's a lot of dry powder on the consumer side. So that's the good news.

HORSLEY: Now, that saving shock absorber won't last forever, of course. People are saving less money now than they were a year ago. In fact, the personal savings rate in March was the lowest it's been in nine years.

SCHMITZ: That's NPR's Scott Horsley. Scott, thank you.

HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.