By Lance Roberts
February 4, 2023 Updated: February 4, 2023
People shop for bread at
a supermarket in Monterey Park, Calif., on Oct. 19, 2022. (Frederic J.
Brown/AFP via Getty Images)
I recently discussed
the recession signals from the
National Federation Of Independent Business (NFIB) and the inverted yield
curve.
“As in 2019, we see many
of the same recession signals from the NFIB survey again combined with a high
percentage of yield curve inversions. Notably, out of the ten yield spreads we
track, which are the most sensitive to economic outcomes, 90% are inverted.”
As noted, many analysts
suggest the economy may have a “soft
landing.” Or, rather, avoid a recession, primarily due to the continued
strength in the monthly employment reports. While those employment reports
remain strong, the rapid decline in growth has been a recession signal in and
of itself. As I stated earlier, the trend of the data is far more important than
the monthly number.
Employment is a critical
factor in the recession equation because the U.S. economy comprises roughly 68
percent of personal consumption expenditures. In other words, what individuals
buy and use daily drives economic activity. It is also the bulk of revenue and
earnings growth for corporations.
The massive drawdown in
savings and rise in credit card debt supported the consumption surge in the
U.S. economy. However, since the turn of the century, consumption slowed along
with economic growth.
A particular recession
signal comes from the massive surge in savings due to the “stimulus checks.”
That boost has fully
reversed as consumers struggle to pay bills. Currently, nearly 40 percent of
Americans are having trouble paying bills, and almost 57 percent of Americans
couldn’t pay a $1000 emergency bill from savings.
“68 percent of people are
worried they wouldn’t be able to cover their living expenses for just one month
if they lost their primary source of income.” And when push comes to shove, the
majority (57%) of U.S. adults are currently unable to afford a $1,000 emergency
expense, said Lane Gillespie in bankrate.com’s 2023
annual emergency savings report.
When broken down by
generation, Gen
Zers (85
percent) and Millennials (79 percent) are
more likely to be worried about covering an emergency expense.
Such is not surprising
considering the current gap between the inflation-adjusted cost of living and
the spread between incomes and savings. It currently requires more than $7500
of debt annually to fill the “gap.”
This is why a high
percent of middle-income families are struggling with the impact of inflation.
“Nearly three-quarters,
or 72%, of middle-income families say their earnings are falling behind the
cost of living, up from 68% a year ago, according to a separate report by
Primerica based on a survey of households with incomes between $30,000 and
$100,000. A similar share, 74%, said they are unable to save for their future,
up from 66% a year ago,” reports
CNBC.
The Recession Signal From Credit Cards
The “recession” signal
from consumers should certainly not be dismissed given their contribution to
economic growth. However, the risk of deeper recession increases as the Federal
Reserve continues to hike interest rates.
Credit cards are no
longer just for luxury items and travel. For many Americans, credit cards are
now the difference between buying food and gasoline and not. Notably, as shown
above, since 2000, consumption has flatlined as a percent of economic growth.
However, credit card loans have continued to rise to support the standard of
living.
As consumers demand
larger houses, luxury goods, cars, travel, and entertainment, real incomes have
failed to keep up with demand. With near-zero interest rates, consumers
leveraged themselves on the back of cheap debt, particularly since the
financial crisis. However, as the Fed continues its aggressive rate hiking
campaign, those short-term rates feed through to variable rate debt, such as
credit cards. This is why a recession signal we should pay attention to is the
sharp spike in credit card payments, which further diverts savings and wages
from consumptive spending to debt service.
Of course, when it comes
to the economy, bad economic outcomes always start with the consumer.
As shown in the consumer
spending gap chart above, the temporary surplus consumers had in 2020,
following the deluge of stimulus, resulted in a massive reversal. Such was
precisely what we suspected would be the case, as I discussed in Biden’s
stimulus Will Cut Poverty For One Year, to wit:
“Social programs don’t
increase prosperity over time. Yes, sending checks to households will increase
economic prosperity and cut poverty for 12-months. However, next year, when the
checks end, the poverty levels will return to normal, and worse, due to
increased inflation.
“In a rush to help those
in need, economic basics are nearly always forgotten. If I increase incomes by
$1000/month, prices of goods and services will adjust to the increased demand.
As noted above, the economy will quickly absorb the increased incomes returning
the poor to the previous position.”
That outcome was evident
with the eruption of inflation throughout 2022, which left the poor in poverty.
In 2023, the consequences of tighter monetary policy will likely affect many
more.
Recession Coming In 2023
While the market is
defiant that the Federal Reserve will engineer a “soft
landing,”
The Federal Reserve has never entered into a rate hiking campaign with
a ”positive outcome.” Instead, every previous adventure to control
economic outcomes by the Federal Reserve has resulted in a recession, bear
market, or some “event” that required a reversal of monetary policy.
Or, rather, a “hard landing.”
Given the steepness of
the current campaign, it is unlikely that the economy will remain unscathed as
savings rates drop markedly. More importantly, the rate increase directly
impacts households dependent on credit card debt to make ends meet.
The whole point of the
Fed hiking rates is to slow economic growth, thereby reducing inflation. As
such, the risk of a recession rises as higher rates curtail economic activity.
Unfortunately, with the economy slowing, additional tightening could exacerbate
the risk of a recession.
The media and the White
House have proclaimed victory by stating the first two quarters of 2022 were
not a recession but only an economic slowdown. However, given the lag effect of
changes to the money supply and higher interest rates, indicators are pretty
clear that recession risk is very probable in 2023.
The consumer is likely to
be the biggest loser.
https://www.theepochtimes.com/recession-signal-as-consumers-struggle-to-pay-bills_5034073.html
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