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.
