An update on US consumer sentiment: A boost in optimism amid the holiday spending season

Consumer optimism in the United States increased six percentage points, reaching 47 percent in the fourth quarter, while pessimism held steady and mixed feelings about the economy fell slightly. This surge in positive sentiment was likely fueled by encouraging economic data and a stock market rally that immediately followed the US general election.

This rise in optimism spanned all income levels and genders, though more baby boomers and Gen Xers than younger consumers reported feeling optimistic. Meanwhile, slightly more Gen Zers reported feeling pessimistic compared with the previous quarter. Overall, consumers’ outlook about the economy was positive in the fourth quarter.

The share of consumers trading down—opting for lower-priced goods, delaying purchases, or taking another action to save money or get more value from a purchase—remained persistently high. Consumers reported feeling more optimistic in the fourth quarter (indeed, many may have had enough disposable income to shop), but 74 percent said they continued to trade down, suggesting that this behavior is stickier than experts expected.

Again, more Gen Xers and baby boomers than younger consumers reported feeling optimistic, making their trade-down behavior even more counterintuitive. These consumers are likely balancing their reported optimism with pragmatism. Notably, private brands are becoming more popular among consumers across income groups by offering high-quality choices that consumers perceive to have high value.

Even ahead of holiday gift giving, fewer consumers said they plan to splurge over the next three months, taking a wait-and-see approach to spending instead. Overall, intent to splurge has remained relatively flat (down 3 percent from last quarter, which is within the margin of error). However, a closer examination of the data uncovers demographic nuances.

Compared with third-quarter survey responses, 10 percent fewer high-income consumers across generations said they intend to splurge over the next three months. This is notable given that these groups typically have more disposable income and are therefore more open to splurging. Additionally, splurge intent among low- and medium-income baby boomers increased, which is intriguing since they also reported trading down at higher rates. This suggests that while they are cautious about everyday expenses, they still find opportunities for occasional indulgences.

For much of the past year, Gen Zers were an outlier among demographic groups, consistently saying they planned to treat themselves by splurging on certain product categories. But in the fourth quarter, the tides changed. Fewer Gen Zers reported plans to splurge—down 11 percentage points to 60 percent, from 71 percent—a significant decline, reflecting the group’s growing pessimism. Not only are Gen Zers’ feelings divergent from older consumers in the United States, but they also differ from their peers in Europe, where more Gen Z consumers showed an interest in splurging in the fourth quarter.

The takeaway: increased optimism does not necessarily translate to higher planned discretionary spending. The decline in intent to splurge, especially among high-income groups and Gen Z, suggests that even those with greater financial flexibility are exercising caution.

Finally, fewer consumers reported an intent to splurge across the top six splurge categories. And even those who said they plan to splurge intend to spend less money on their splurge purchases. This was evident across generations and income levels, indicating that greater economic optimism and the holiday spirit did not translate into greater interest in splurging.

Optimism in the strength of the US economy rebounded from the second quarter, increasing to 41 percent from 33 percent. Despite the increase, economic volatility and concerns over the economy may affect US consumer optimism through the end of 2024.

Unsurprisingly, high-income consumers were more optimistic about the economy in the third quarter than middle- and low-income consumers. But age, not income, seems to be the main determinant of third-quarter results. Gen Zers and millennials across income groups report higher rates of optimism compared with Gen Xers and baby boomers. This could be related to the long-term unemployment rate, since a higher percentage of Gen Xers are long-term unemployed, or unemployed for more than 27 weeks, than those in younger generations.

Another divergence among demographic groups stood out: male respondents note higher levels of optimism (47 percent) compared with female respondents (37 percent). Levels of optimism increased relative to the second quarter for both groups, and the gap between male optimism and female optimism has held steady for the past year. Male respondents report feeling optimistic about an improved job market in the third quarter, while female respondents indicate feeling concerned over making ends meet.

While inflation has consistently dropped from its 2022 peak, 53 percent of respondents in our survey still say that rising prices and inflation are among their concerns. This may be due to an “inflation overhang,” or the idea that it takes consumers months, if not years, to adjust to new, higher prices even as inflation stabilizes. Not all consumers are slow to catch on: 37 percent of respondents say that stabilizing inflation has made them feel more optimistic about the economy, up from 31 percent in the previous quarter. Several retailers have announced plans to lower prices on everyday items, which may be contributing to higher optimism.

In the most recent survey, consumers indicated they planned to increase their spending on most essential, semi-discretionary, and discretionary items over the next three months. In a few categories, including fresh produce and home improvement and gardening supplies, consumers say they plan to decrease their spending compared with the second quarter. This makes sense, given that consumers are probably expecting to spend less on gardening supplies as summer winds down and fall begins.

Consumers, especially Gen Z and millennials, continue to be price sensitive. Seventy-six percent of consumers report trading down—that is, changing the type or quantity of purchases for better value and pricing—in the third quarter, consistent with earlier in the year; however, that figure rises ten percentage points, to 86 percent, among Gen Zers and millennials. Among these younger consumers, nearly 50 percent report changing retailers for a lower price or discount, up from 44 percent last quarter. Gen Xers report trading down at a lower rate than Gen Zers and millennials (76 percent). Unsurprisingly, low-income consumers report trading down more frequently than high-income consumers.

Consumers report using buy now, pay later (BNPL) services more in the third quarter compared with the second quarter. E-commerce sales events in July and back-to-school shopping may account for the growing use of these services. Despite fewer middle- and high-income consumers trading down compared with low-income consumers, more middle- and high-income consumers report using BNPL services (18 versus 15 percent). This may be because some BNPL services require purchases to exceed a specific amount, which may be higher than lower-income consumers are willing to spend. More Gen Z and millennial consumers report using BNPL services than average, while fewer baby boomers are doing so.

Once again, consumers report trading down while at the same time signaling their intent to splurge. In the third quarter, more consumers across income and age groups indicate an intent to splurge compared with the previous quarter (42 versus 38 percent). It’s likely that the increase in reported optimism contributed to these findings. It’s also possible that consumers, some of whom have felt the pinch on their wallets thanks to inflation, are looking for ways to treat themselves after a period of sustained financial stress, both perceived and real. Low-income Gen Xers and middle-income baby boomers were the exception, however: both groups indicate a decrease in their intent to splurge compared with the previous quarter.

Roughly the same share of consumers reported their plans to splurge on dining out over the next three months compared with the second quarter (40 percent in the third quarter versus 39 percent in the second quarter). More high-income consumers reported plans to splurge on travel over the next three months than they did on groceries, indicating there may be a deepening divergence between high-income consumers and low-income consumers. One caveat to all this data: consumers may report an intent to splurge, but economic uncertainty and other external factors may affect their actual spending behavior.

Female respondents in our survey say they are prioritizing beauty and personal-care splurges over the next three months. This is particularly true for high-income Gen Z women (59 percent say they intend to splurge in these categories, up from 33 percent in the second quarter). Male respondents indicate a higher intent to splurge on food, although only 30 percent of high-income Gen Z men intend to splurge on restaurants, down from 51 percent in the second quarter. Similarly, high-income female baby boomers deprioritized restaurants; only 38 percent of these consumers say they plan to splurge on restaurants in the next three months, down from 52 percent in the second quarter.

Optimism about the strength of the US economy fell in the second quarter of 2024, the lowest it’s been since the end of 2023. This follows the first quarter’s spike in optimism, which was the highest since 2022. Mixed feelings, which accounted for the majority of consumer sentiment, also rose in the second quarter. Together, these shifts could signal a meaningful shift in consumer spending.

Survey responses indicate that consumers were primarily concerned about rising prices, which have grown at a higher rate than the Federal Reserve’s target inflation figure. Consumers said they have noticed price increases on essential items and services including fresh produce, meat and dairy, center-store groceries, food delivery, and gasoline.

Notably, differences grew in how younger and older consumers perceived the economy. Younger consumers were more optimistic about the economy (optimism rates for Gen Z and millennials were 41 percent and 38 percent, respectively) than older consumers (optimism rates for Gen X and baby boomers were 29 percent each). Urban consumers reported feeling more optimistic compared with suburban and rural consumers.

Consumers said they expect to increase their spending over the next three months on most essential items. In this category, they expect to increase their spending on gasoline the most—an intent likely driven by higher fuel prices and the expectation that consumers will drive more during the summer months.

Expectations for spending on semidiscretionary items followed typical seasonal trends. For example, consumers planned to spend less on fitness and wellness services, a pattern that usually follows a spike in spending on this category—often attributed to New Year’s resolutions—that occurs at the beginning of the year.

While intent to spend on most essential items grew, consumers planned to pare back their spending on discretionary items, particularly in travel and hospitality-related categories. As we head into the summer months, we expect to see the biggest decrease in quarterly spending on international flights, hotel and resort stays, and cruises. Consumers also said they plan to reduce their home-related spending, such as on furniture and decor, while they plan to spend more on gardening supplies for the spring and summer seasons.

Last quarter, most consumers continued to trade down—reducing the quantities they bought, searching for better prices, or delaying purchases—as they did for much of last year. This occurred across generations, although more Gen Zers and millennials reported trading down this quarter compared with last (to be sure, these consumers, particularly Gen Zers, also selectively splurged). Fifty-six percent of Gen Z and millennial shoppers—compared with 45 percent of older generations—said their primary trade-down strategy was to adjust the quantity or pack size of items purchased.

While most consumers continued to trade down, 10 percent of consumers said they traded up in the past three months. A growing number of high-income Gen Z consumers reported trading up in the second quarter of 2024 compared with the previous quarter (27 percent versus 23 percent) across a range of categories including accessories, apparel, baby supplies, and groceries. (Low-income Gen Zers traded down across these same categories.)

Compared with last quarter, slightly fewer consumers across age and income groups said they plan to splurge in the next three months. Although Gen Zers and millennials were more likely to say they would splurge over the next three months compared with older consumers, millennials’ (particularly high-income millennials’) intent to splurge declined from the previous quarter. The biggest declines in intent to splurge were in groceries, personal-care items, vehicles, and household essentials.

Gen Zers across income levels reported not only the highest intent to splurge of any generation but demonstrated the highest increase in intent to splurge from the previous quarter.

Consumers across all age groups continued to indicate a desire to selectively splurge. More people indicated an intention to splurge while dining out at restaurants and bars (39 percent) compared with any other category. There were some differences in responses by generation: Gen Zers and millennials indicated greater interest in splurging on beauty and personal care, apparel, and jewelry than older consumers, while Gen Xers and baby boomers indicated a preference to splurge on groceries and travel.

Consumers indicated they plan to increase their purchases of essential items. The average consumer said they expected to spend more on fresh produce, meat and dairy, and center-store categories (which include the items one might expect to find in the center of a grocery store, such as shelf-stable foods or frozen foods). Among discretionary items, consumers expressed in February a higher intention to spend on travel and home (such as on short-term rentals, home improvement, hotel resort stays, and flights) than they did in the fourth quarter of 2023.

Consumers anticipated reducing their purchases of toys compared with last quarter—no surprise, given that toy sales are typically higher during the holiday season than at the beginning of a new year. Meanwhile, consumers said they expect to allocate more of their budget toward fitness and wellness, once again, in line with typical spending habits at the beginning of a new year.

Trading down—or changing the type or quantity of purchases for better pricing and value—was still prevalent among consumers in February, although slightly fewer consumers reported trading down this month compared with the end of 2023. Younger consumers traded down more than older consumers, and, not surprisingly, low- and middle-income consumers traded down more than high-income consumers. Among lower-income consumers, there was a split among generational lines: millennials and baby boomers in this group reported trading down less frequently in February compared with the last quarter of 2023, while Gen Z and Gen X consumers in this group reported trading down more frequently.

Fewer consumers reported switching to lower-priced retailers and brands in February compared with the end of last year. The reported use of “buy now, pay later” services plateaued in February, and fewer consumers said they delayed a purchase in the past three months.

Consumers expressed a desire to splurge, and more than a third of respondents in our survey said they expected to splurge on food. But consumers’ ideas about what to splurge on have evolved: rather than splurging on dining out, consumers said they intended to splurge on food at home more than they did at the end of 2023. This change was most evident among Gen Zers and millennials.

Travel also became a more popular splurge category in February, moving ahead of apparel and beauty, which it trailed in the last quarter of 2023. More baby boomers said they planned to splurge on travel in the next three months than any other age group.

Consumer confidence held steady. While consumer sentiment has remained relatively steady throughout the year, we have seen a slight uptick in pessimism since the spring. Even though the majority of consumers are in good financial shape, slightly more Americans believe the economy is headed for a recession and are preparing accordingly.

Spending expectations rose. As inflation remained above the Federal Reserve’s target rate, consumers indicated they would adjust their spending habits by prioritizing spend on essential items such as baby supplies, gasoline, and food, while reducing spend on semidiscretionary products such as skincare and makeup, vitamins, and vehicles. Toys are the only semidiscretionary category in which consumers said they planned to boost spend in the following three months compared with last quarter—not surprising, in light of the holiday season.

The run-up to the holidays may also buoy spend in a handful of discretionary categories where consumers have been cutting back. These categories include jewelry, accessories, and home decor.

Consumers traded down. For much of the past year, consumers said they adapted their purchasing behavior to stretch their dollars further. Seventy-seven percent of Americans surveyed said they took some kind of trade-down action in the past three months. More consumers said they used buy now, pay later (BNPL) services in the fourth quarter of 2023 than in the prior quarter—again, likely because it’s the holiday shopping season. This payment method was particularly popular with younger consumers (26 percent of Gen Zers and 28 percent of millennials said they used BNPL services compared with 14 percent of Gen Xers and 6 percent of baby boomers).

Gen Zers planned to splurge. Once again, Gen Zers expressed the highest intent to splurge in the next three months compared with other age groups (63 percent versus 38 percent overall). What’s more, these young consumers also expressed the greatest increase in intention to splurge from the third quarter. The desire to “treat yourself” was even more pronounced among high-income Gen Zers.

Selective splurging persisted. Still craving experience-driven purchases, more consumers expressed an intention to treat themselves in the next three months by dining out at restaurants than by splurging on any other category. But splurge categories varied by generation. Millennials and Gen X individuals said they intend to splurge more on food, including both dining out and purchasing food for home consumption. Gen Zers, on the other hand, said they plan to splurge on beauty and personal-care products, apparel, and jewelry. Baby boomers said they intend to treat themselves with food and travel experiences.

In the final months of 2023, consumers indicated their intention to reduce overall spend in several discretionary spending categories—while their desire to splurge increased in those same categories. Restaurants offer one example: net intent to spend on dining at restaurants decreased by 21 percent, but the intent to splurge at restaurants rose by 38 percent. This likely suggests that consumers are planning to visit restaurants less frequently but may be willing to spend more during their visits.