If there is a recession in the United States this year, it probably won’t be because consumers spontaneously run out of spending power. (If unemployment abruptly rises, that’s another matter.) I’ve put together five charts that show that consumers are in reasonably good shape, although life is getting harder for the most vulnerable groups.
Households aren’t “the place to look for economic weakness,” Michael Pearce, the deputy chief U.S. economist for Oxford Economics, a forecaster, told me last week.
True, it’s easy to find worrisome statistics. The personal saving rate fell in December to 3.7 percent of disposable personal income, which except for a dip in 2022 was the lowest since 2008. “In 2023 consumers were still on average somewhat better off financially than they were in 2019, but the trend is negative,” the Consumer Financial Protection Bureau wrote in a December report. “While there are some indications the economy is improving, what our experience shows is that many families are not seeing this improvement in their bank accounts,” Mike Croxson, the chief executive of the National Foundation for Credit Counseling, said in a statement last week.
But the news isn’t all bad. The first chart is from a study last year by Federal Reserve staff economists estimating the remaining amount of “excess” savings — greater-than-usual savings that households accumulated during the pandemic, when there was lots of stimulus money coming in and relatively few opportunities to spend it.
Measuring excess depends on defining normal, which is tricky. The Fed study found that if you define normal using the saving pattern for the entire period since 1950, the excess has been more than used up. But going by the pattern since just 1990, households are still sitting on excess savings equal to 4 percent of U.S. gross domestic product, leaving them with plenty of spending power.
Even if you could manage to get a precise figure for excess savings, you might not learn much about the economic outlook, because the relationship between saving and spending is loose. “The saving rate doesn’t have this magnetic pull to some threshold that we can consider normal saving,” John O’Trakoun, a senior policy economist at the Federal Reserve Bank of Richmond, told me last week.
Wealth also matters for spending. The rise in the stock market and housing market has made people feel richer, which has prompted them to open their wallets. “What elevated net worth since the pandemic seems to be telling us is that spending levels will be elevated versus prepandemic benchmarks for some time,” O’Trakoun wrote in an email.
Not everyone has benefited equally or consistently from rising wealth, though. Since 2022 there have been some big changes in who wins and who loses, as the following two charts show. This one shows that the middle fifth of households by income had the biggest wealth gains from the start of the pandemic through the third quarter of 2022, but almost no gains since.
The next chart shows that households headed by people under 40 had the biggest percentage gains in wealth over the first period, but very little since. That makes sense: Younger families were more likely to get stimulus payments during the pandemic. But they’re less likely to own houses and stocks, so they haven’t benefited as much from the gains in those asset markets.
Families will be more likely to cut back on their spending if their net worth isn’t rising the way it used to. People hoping to buy a first home have already been squeezed by a combination of high prices and high mortgage rates.
One sign of stress on households — which I wrote about last month — is an increase in the rate of delinquencies on credit cards and auto loans among lower-income households. The good news is that households with annual incomes of less than $50,000 still aren’t using as much of their available credit on average as they did before the pandemic hit, as the following chart, based on Bank of America internal data, shows. “We think this suggests that consumers continue to have ‘dry powder’ to support their spending,” the Bank of America Institute said in a report this month.
I’ll finish with a chart based on one created by Pearce of Oxford Economics. Drawn from data collected by the Bureau of Labor Statistics, it shows that lower-income households spend more of their income on rents, health insurance and other necessities, while upper-income households spend relatively more on financial services and what economists call owner-equivalent rent, which is an estimate of what homeowners would pay for where they live if they were renters.
Pearce used the data on spending patterns to create price indexes for each income group — that is, the amount of inflation each group encounters. Then he applied those to the earnings of each income group. He found that since the pandemic began, inflation-adjusted earnings grew the most for the lowest quarter of households by income and the least for the highest-earning quarter.
It’s a mixed picture. Lower-income households haven’t fully shared in wealth gains from housing and stocks, but they’ve more than held their own in incomes adjusted for inflation. On the whole, it looks like the American consumer is in reasonably healthy condition.
Outlook: Blake Gwinn, Izaak Brook and Michael Reid
The United States is likely to avoid a recession this year, in spite of a big increase in interest rates, because this is not an ordinary business cycle, according to an RBC Capital Markets note to clients on Friday by Blake Gwinn, the head of U.S. rates strategy, Izaak Brook, a U.S. rates strategist, and Michael Reid, a U.S. economist. “Rather than the typical ebb and flow of fear to greed (and in turn stability to instability), economic conditions post-2020 have been almost entirely driven by idiosyncratic ripples still emanating from the Covid-19 pandemic,” they wrote. “Beyond the normalization of 2024, we see a renewed expansion on the back of a capex/productivity revival as more likely than a recession,” they added. (Capex is capital expenditures, also known as business investment.)
Quote of the Day
“We can shape industries to be pro-competitive from the beginning so that there is no need to ‘unscramble the eggs’ — to unwind highly concentrated industries after the fact.”
— Heather Boushey, the chief economist of President Biden’s Investing in America Cabinet, in a blog post (Oct. 12, 2023)
