Are Customers Pulling Back on Spending? Evidence From the Richmond Fed Business Surveys

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In the last few years, consumer spending in the United States has been remarkably resilient. In our August business survey, we sought to understand if Fifth District firms have recently experienced softening demand for their goods or services. A majority of firms reported that over the past three months, customers decreased the amount of goods and services purchased - both in quantity and in dollar amount. The survey also found that demand has softened more for manufacturers and retailers than firms in other industries. Additionally, firms reported that lower-income customers pulled back on spending more than higher-income customers.

Fifth District Firms Report Declines in Customers Spending

Since mid-2022, most firms in our business surveys reported steady or declining demand. The chart below presents diffusion indexes, or the share of firms that reported an increase in new orders (or demand for service sector firms) minus the share that reported a decrease. For manufacturing new orders, the diffusion index has been consistently below zero for most of the last two years. For services providers, the index has been hovering around zero, occasionally dipping into negative territory.¹

In our August survey, we asked firms if they were experiencing declines in customer demand in the last three months outside of normal seasonal trends. About 60 percent reported that customers have purchased less in either units or in dollar amounts. This was especially prevalent among those in the retail, accommodations, and food services industries and for manufacturers. About two-thirds of firms reported that customers have delayed purchases. This trend in delayed purchases is similar across most industries.

Firms Reported a Shift in Customer Behaviors

Customers have changed their purchasing activity over the past three months. Thirty percent of businesses reported that customers have declined to purchase entirely from their stores. However, many firms across industries also noted a change in the types of goods and services that customers were choosing. Almost half of responding firms reported that customers have shifted purchases to cheaper items. Furthermore, about 40 percent noticed that customers were more responsive to promotions or sales. On the other hand, nearly 40 percent of firms reported that customers will only purchase in normal volumes if they perceive the goods or services to be high-quality.

The increased responsiveness of customers to perceptions of either value or quality aligns with what we are hearing from Fifth District businesses. As one food and beverage retailer said:

Lower-Income Customers More Likely to Pull Back on Spending

We also asked firms in our August survey for information on consumer spending across income levels. Nearly 60 percent of respondents reported spending reductions from lower-income customers compared to about 30 percent from higher-income customers. This trend is similar among manufacturing and service sector firms.

A computer repair shop noted that they needed to shift business strategies due to declining customer demand:

Closing

Starting in mid-2022, firms in our business surveys became more likely to report decreases in customer demand. In our August survey, most Fifth District respondents reported that customers pulled back on the quantity or dollar amount of goods and services purchased. This pullback was especially true among lower-income individuals. Understanding how demand for regional firms is evolving is critical to our understanding of the health and direction of our regional economy. Thus, we will continue to ask firms about changes in demand for their products and services.

Views expressed are those of the author(s) and do not necessarily reflect those of the Federal Reserve Bank of Richmond or the Federal Reserve System.