Savings

Strong consumer spending may stave off recession, but pandemic economies are exhausted

Neither the author, Tim Fries, nor this website, The Tokenist, provides financial advice. Please review our website policy before making any financial decisions.

Over the weekend, Treasury Secretary Janet Yellen tried to allay fears about growing economic distress. Although the latest Financial Times survey reports that 68% of macroeconomists predict a recession by 2023, Yellen remains optimistic.

In an interview on ABC’s This Week on Sunday, Yellen noted several points as to why a recession isn’t set in stone.

  • Consumer spending is still strong, albeit skewed toward basic necessities due to higher food and gasoline prices.
  • For April, personal income increased by $89.3 billion (0.4%), while personal disposable income (PDI) increased by $48.3 billion (0.3%).
  • Administrator Biden is also considering the idea of ​​a federal gasoline tax exemption, which is currently 18.4 cents per gallon (now above $5).

Yellen noted that it will take “skill and luck” to avoid recession, but it is possible. However, macroeconomic factors still cast a shadow of uncertainty over the US economy.

Who calls a recession?

Many factors must be taken into account to declare a recession: rising unemployment, falling gross domestic product (GDP) over a period of time, and a reduction in retail sales and personal income. Due to the complexity involved, it is not for anyone to declare the recession as such.

Instead, the nonpartisan National Bureau of Economic Research (NBER) must come to this conclusion through its Business Cycle Dating Committee. The NBER then reports it to the Federal Reserve and US Treasury who act accordingly.

Image credit: nber.org, source: Bureau of Labor Statistics via Federal Reserve Bank of St. Louis

As you can see, when the unemployment rate is high, the NBER usually declares a recession (shaded periods), but only if accompanied by other parameters. In May, the unemployment rate was 3.6%for the third consecutive month.

Consumer spending: a key metric for determining recession risk

If consumer spending does not stay positive, there is generally no growth in retail sales. This, in turn, can lead to increased unemployment. As noted earlier, personal income expenditures and DPI increased in April.

Personal consumption expenditure (PCE) increased by $152.3 billion (0.9%), according to the Bureau of Economic Analysis (BE A). Overall consumer spending reached $13,924.80 billion in the first quarter of 2022.

However, it remains to be seen whether May and June will maintain this trend. The next report is not expected before June 30. In the meantime, it is clear that the inflation rate, currently at 8.6%, is not accompanied by wage growth. It currently sits at 6.1% unweighted for all categories in May.

Tracking wage growth, image credit atlantafed.org

In addition, the high rate of inflation for 40 years is rapidly eating away at people’s savings. As another measure of disposable income, the personal savings rate fell to 4.4% in April, a return to the level of the 2008 global financial crisis.

Personal savings rate since 1960, image credit: Federal Reserve Bank of St. Louis

Similarly, to maintain the current standard of living while keeping their debts, consumers are tapping into their revolving credit card debt, after having increased it by 19.6% in April. Needless to say, this increased total debt by 8.2% in the first quarter of 2022.

Image credit: KKR.com

In raw numbers, credit card debt jumped to $1.103 trillion. Given that the richest 20% of households by income level own 49% of the real estate, it is also not surprising that the total indebtedness of American households is linked to mortgages.

According to the Federal Reserve Bank of New York, Q1 2022 ended with an increase in household debt of $266 billion (1.7%), for a total of $15.84 trillion, which is in line with the pre-C19 level. Of this amount, $250 billion corresponds to the increase in mortgage loans, to $11.18 trillion in March.

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Stimulus checks spent

In conclusion, what does Yellen mean by “skill and luck” given these data points? First, it’s hard to take someone seriously after repeatedly failing to consider that a historic increase in the money supply won’t cause runaway inflation.

Moreover, given the lowest personal savings rate in 14 years, it is clear that $5 trillion spent on stimulus checks has been exhausted:

  • $1.8 trillion to singles and families
  • $1.7 trillion to businesses
  • $745 billion to local and state municipalities
  • $482 for health care
  • $288 for miscellaneous

In other words, when the Ohio police have to reduced regular patrols due to soaring gas prices, this is not a good sign. Inflation may have already swallowed up the windfall of stimulus checks, but high gas prices are even more damaging to all goods and services that rely on transportation.

This is one of the main reasons why consumer confidence is at an all-time low, triggering a sell-off in all markets. Over the past five days, only the Nasdaq (NDAQ) has risen against the Dow Jones Industrial Average (DJI) and S&P 500 (SPY) indices.

Of the major assets, Ethereum is the worst as smart contract platforms take a hit. Image Credit: Commercial View

Crypto assets are still having a bad week, due to all the leveraged liquidations. While Bitcoin briefly dipped below $18 in the past two days, $600 million value of closeouts transpired. Of course, the contagion spread from Terra’s collapse to Celsius and 3AC had an additional selling effect.

Should weak consumer confidence change, significant positive news for gasoline prices should follow. This will be clarified after President Biden meets with Saudi officials next month.

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Due to late reports, do you think we are already in a recession, as Elon Musk pointed out last month? Let us know in the comments below.

About the Author

Tim Fries is the co-founder of The Tokenist. He has a B.Sc. in Mechanical Engineering from the University of Michigan and an MBA from the University of Chicago Booth School of Business. Tim was a senior partner on the investment team in the US Private Equity division of RW Baird and is also a co-founder of Protective Technologies Capital, an investment firm specializing in detection, protection and control solutions.