Americans spending their savings could trigger a recession

Rising wages and a “cash buffer” of savings built up during the pandemic — when spending slowed and benefits like stimulus checks and increased unemployment boosted incomes — are giving consumers a boost, according to Liz Young, head of investment “unprecedented purchasing power” awarded strategy at SoFi, an online bank. But data shows that many Americans have started using credit cards to fund their new spending habits and have drained their savings in recent months as the cost of living soars. Some pundits fear this could portend a slowdown in spending — or even a recession.

“My intuition and common sense say there is no bottomless savings hole to prop up this level of spending, and there is no bottomless wage growth to keep it high enough to propel GDP indefinitely,” Young wrote in an article from Thursday. “Time will tell, but I still believe something has to give way.”

U.S. consumer credit card balances rose 7% in the fourth quarter of 2022 to a new record high of $986 billion, a report from the New York Federal Reserve showed this week. And Morgan Stanley estimates that last year alone, consumers spent about 30% of the $2.7 trillion in excess savings they amassed during the pandemic, with lower-income consumers tapping into nearly 50%.

“At the pace of spending we anticipate, savings are on track to dwindle rapidly,” the investment bank’s economists wrote in a Jan. 24 note, arguing that in 2023 consumers could shed an additional $500 billion of their pandemic savings would spend.

Americans’ ailing savings accounts and growing reliance on credit cards will likely result in consumer spending — which accounts for 70% of US GDP — falling this year. And with leading economic indicators like manufacturing orders and credit conditions also deteriorating, some economists like Ataman Ozyildirim, senior director of economics at The Conference Board, a nonprofit research organization, believe a recession is inevitable.

“Indicators on the labor market – including employment and personal income – remain robust so far. Nonetheless, The Conference Board continues to expect high inflation, rising interest rates and falling consumer spending to push the US economy into recession in 2023,” he wrote on Friday.

Conflicting data and recession fears

Conflicting data on US consumer health this year has caused confusion among even the most seasoned economists.

After falling for two consecutive months, retail sales rebounded sharply in January. And researchers at the Bank of America Institute said they found “signs of strengthening consumer spending earlier this year” in a new report, noting that spending on credit and debit cards per household rose 5.1% in January have increased compared to the previous year.

The US economy also added 517,000 jobs last month, pushing the unemployment rate to a 53-year low of 3.4%; social security contributions have increased dramatically since last year; and the minimum wage has skyrocketed in different parts of the country.

“The still strong position of the labor market in January confirms that households and the broader economy are still relatively stable,” says Cailin Birch, global economist at the Economist Intelligence Unit (EIC), the research and analysis arm of The Economist Group wealth.

Annual inflation, as measured by the consumer price index, fell to just 6.4% in January from its June high of 9.1%, the Bureau of Labor Statistics reported on Tuesday. With jobs plentiful and inflation slowing, Goldman Sachs last week lowered its forecast for the probability of a US recession to 25% from 35%.

But recent upbeat economic data collides with a slew of other stats that suggest consumers’ ability to keep spending at high levels is waning.

Although inflation is falling, high prices are still affecting Americans at all income levels. Over 80% of middle-income households have cut their savings or taken money from existing savings to make ends meet in the last three months of 2022, financial services firm Primerica found in a new study. And Gregory Daco, chief economist at EY-Parthenon, said so financial times This week, lower-income families spent all of their pandemic savings and started “dipping” into regular savings.

Overall, nearly 65% ​​of Americans were living paycheck to paycheck at the end of 2022, up 9.3 million from the year before, according to a new report by PYMNTS and LendingClub. And the personal savings rate — which measures Americans’ savings as a percentage of disposable income — has fallen from 9.3% in pre-pandemic February 2020 to just 3.4% in December.

In addition, Ted Rossman, senior industry analyst at Bankrate, warned that Americans finance much of their spending with credit card debt. Total household debt rose 2.4% to a record $16.9 trillion in the fourth quarter, driven by a 15% year-over-year increase in credit card debt, according to the New York Federal Reserve.

“Robust consumer spending, the hottest inflation in 40 years and significantly higher credit card rates have combined to push credit card balances to a new all-time high,” he said wealth Thursday, noting that 46% of credit cardholders now have credit card debt, compared to 39% a year ago.

ECI’s Birch warned that rising interest rates and high inflation are “putting an increasing financial burden on households”, arguing the trend is not going to end anytime soon.

“As interest rates continue to rise in the coming months… this will result in consumer spending slowing significantly throughout 2023,” she said.

That’s not good news, as consumer spending accounts for 70% of US GDP, making it critical to economic growth.

Jennifer Timmerman, an investment strategy analyst at the Wells Fargo Investment Institute, even wrote a note this week titled “What Slacking Consumer Spending May Herald,” warning that she’s already seeing falling spending and signs of “financial stress” in households that are spending have pointed to a downturn in the past.

“We believe the pressure on inflation-adjusted wages, combined with the impact of Federal Reserve rate hikes, will trigger an economic slowdown in the coming months. Traditional recession signposts are already signaling this,” she wrote in a note Tuesday.

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