Wall Street remains braced for a recession eventually.
That's in part because consumers are poised to slow
down their spending.
March was really kind of a big month in terms of
spending slowdown, but it's not just bad news.
We're not seeing like things deteriorating at a
really rapid pace.
But the slowdown is there.
But a recession may never materialize if consumers
keep spending.
I continue to think that it's it's possible that this
time is really different.
And the reason is there's just so much excess demand
really in the labor market.
I mean, it's.
Been amazing how resilient in a way, the consumer has
been to this inflationary shock.
The consumer is still very strong.
They're just spending differently.
People are still spending.
And that has been important to the economy.
We've been talking about the possibility of recession for
what felt like, you know, a very, very long time.
And for now, you know, the global economy is holding
up.
But some people are reining in their budgets.
I don't like to save my money.
And that was part of the problem. I like to spend
money. I felt like a lot of people might have a similar
experience, especially since we live in a consumer
economy.
How much longer can consumers keep the US
economy afloat?
Many Americans are reworking their budgets as
inflation stays hot.
But last year I was living in Arizona.
I was paying rent and I was getting frustrated because
my income was it felt like it was disappearing.
It felt like I wasn't making progress on my
savings goals. And I felt like, how am I supposed to
not be a renter if I can't save enough to not be a
renter anymore? So that was one of the contributing
factors to me moving back home to California, where
the income is actually higher and the cost of
living is higher as well. But because I'm living at
home, I'm saving on that.
The reality is that as prices are rising, the
things that you have to pay for the everyday expenses,
your rent, your mortgage, your utilities, food, all of
that is increasing and increasing dramatically.
In some cases.
In a February 2023 survey, four out of five consumers
said they were tightening budgets by buying less in
bulk or shopping around more often for better deals.
These sorts of micro decisions have a huge
influence on the pace of economic growth.
Consumer spending represents more than half of the
economy. It's close to 70%.
If consumer spending is strong, that alone is,
generally speaking, enough to keep the economy from
slipping into a recession.
In Europe, it's a little bit less.
Exports are much more important driver of economic
activity than perhaps, say, here in the United States.
And then we look at China and other parts of Asia and
again, the manufacturing base much more important.
So, yes, the US is very much a stand out in terms of
the importance of the consumer to to overall
economic health.
The strong consumer spending may be keeping inflation hot
In March 2021, the headline inflation rate shot past the
Federal Reserve's target of 2%.
Fast forward to April 20th, 23 and inflation remained
close to 5% annually.
The escalating prices are only just beginning to slow
people down.
Consumers still have the financial buffer even when
spending is slowing. The process might be gradual
because they still have money in their bank
accounts.
At the end of 2023 first quarter gross domestic
product grew at 1.1%.
While not negative, this growth isn't strong enough
to rule out the possibility of a recession.
Something is occurring underneath the hood here.
People are shifting what they buy.
People spent big on physical goods during
lockdowns, but services are now commanding the strongest
spend.
When you're looking at where spending is taking place,
particularly as you're looking at travel and
leisure and entertainment, that is a higher income
consumer.
According to McKinsey, many people remain ready to
splurge on experiences.
Spending in other categories like restaurants
and apparel are up too, but so are absolute necessities.
I'm feeling it when it comes to food, which is so weird
for me because I've never really concerned myself with
how much food costs.
You know, what drives consumer spending?
Well, it's either your income or your access to
debt. Know that's all you or you can run down your
savings. This pressure from all three factors is is
going to make. Even if we don't get a recession, it's
going to be quite a painful economic period for many,
many households in America.
Economists believe that people with less money may
turn to credit to cover expenses in this economy.
I think it's really scary how much people are using
credit to be able to afford what they need to have every
day.
That sentiment shows up in this data set from the Bank
of America Institute.
We care about credit utilization because we want
to see how leveraged is the consumer, right?
Are they really borrowing to finance their spending or
are they spending the money they already have.
Through the pandemic?
Americans were using less credit, but that trend is
starting to reverse.
At the end of 2022, the average household had nearly
$10,000 in credit card debt.
Analysts believe that nationwide credit card debt
may soon reach $1 trillion an all time high.
Putting everyday expenses on credit is so very dangerous
because we know that as interest rates have been
rising, so have rates on credit cards.
So is the interest that you're paying on that money
that you are indeed borrowing to pay for
everyday expenses?
Credit card interest rates have never been higher.
Topping 20% nationwide in February.
These interest rates move up and down depending on the
central bank's federal funds rate.
And these rates are generally only charged to
customers who carry a monthly balance.
As consumers run into headwinds, other parts of
the economy are flashing warning signs, too.
There's been a lot of speculation since the recent
failures of a couple of large banks.
This could spark a reduction in in credit.
You know.
Banks are becoming much more nervous.
They've seen a bit of deposit flight in some of
these small and regional banks. This combination of
higher borrowing costs and reduced access to credit,
this double pincer movement, if you like, on
the household and the corporate sector of America,
is, I think, what could be really, really concerning
and damaging for the growth prospects.
While the average consumer is doing well, the economy
is split. This demand could be driven by strong growth
in assets, particularly housing in the US.
Home prices have risen nationwide by more than 30%
since 2020.
Roughly two thirds of US households own a home.
Economists believe that these house price increases
can amplify spending.
If you do, in fact have equity in your home, you may
potentially be in the market for a home equity
line of credit. This is the ability to borrow against
your home value.
But there are risks of home equity lines of credit too,
especially depending on the path of interest rates.
You have to keep in mind that you are indeed
borrowing money here.
And so there will be rates, interest rates on this
amount of money that you're borrowing. So it's something
to consider, but to look at very carefully, to make sure
that you're still able to cover the cost of living in
your home.
The Federal Reserve for now says those interest rates
will stay higher for longer.
With today's action.
We have raised interest rates by five percentage
points in a little more than a year.
We are seeing the effects of our policy tightening on
demand. It will take time, however, for the full
effects of monetary restraint to be realized,
especially on inflation.
When this rates going up, it makes economic conditions
tighter for everybody, especially people without
assets.
It's been the most aggressive and rapid pace of
interest rate increases for 40 years.
We can all feel it in our pockets.
So had this form up in my bio on my social media and I
said, Hey, like, would you like a budget?
Fill this out, I'll send you a budget.
And over 200 people replied in the span of like three
days, which was completely overwhelming.
No, I did not get to everybody. That was shocking
the amount of people that I was worried for.
Another factor may be weighing on Americans.
The average tax refund in 2023 is lower than it was in
2022. This can affect the purchasing power of moderate
income families.
But another positive sign for the lower income is that
their wage level, their wage growth is still the
highest among all income cohorts.
And now if you think about the other side of the income
spectrum, the higher income folks, our data is showing
that their wage levels are falling.
Right? What they're making in the paycheck right now
might be smaller than a year ago, but they're not
seeing so much of a drawdown in their bank
savings because they presumably accumulate a lot
of savings over the pandemic.
So with these two factors combined, I think both ends
of the income spectrum are facing some headwind.
But there's other counter factor that that provides
additional buffer to them.
Leading economists haven't declared a recession as of
May 2023, but some do see early signs of a slowdown
mounting.
I think if you view this post-COVID recovery as an
era that has been elevating into the atmosphere, I think
it's losing its energy now.
It hasn't yet started to turn down, but I think it's
clearly facing stronger headwinds now.
I think it's unlikely that we're currently in a
recession. And probably the biggest reason for that is
that the labor market is as strong as it is.
Many of those open jobs are in.
Manning industries like food and hospitality.
The future path of the economy could depend on
whether businesses can pay these workers a living wage.
From an income perspective, things they're not as good
as perhaps they were.
You know, we had this period where income
inequality perhaps can perhaps shrunk, but now fear
that we are in once again in the situation where those
that have got the cash are in a much better position
than those that are unfortunately struggling a
little bit more.
I think many people are still living paycheck to
paycheck. So this is not pain, financial pain that's
only facing a few.
It's facing the majority of Americans, regardless of how
much money they're making.