The US consumption figure looks robust.
A 0.9% increase in personal spending in April looks good on paper, especially given the challenges facing the economy. This seemingly high number supports an average consensus estimate for the second quarter gross domestic product (GDP) of 3% according to the Blue Chip financial forecast.
However, the Atlanta Fed’s GDP now forecast for the second quarter is at a very low 1.9%. If confirmed, the US economy may not have seen growth in the first half of 2022 after the first quarter decline, narrowly avoiding a technical recession.
Evidence of the slowdown does not just come from temporary and external factors. The consumer and business confidence indicators present a less favorable environment than the expectations of an optimistic market consensus. According to Focus Economics Estimates Aggregate, the US economy is expected to grow 3.6% in 2022, helped by very strong third and fourth quarters, at 4.9% and 5.5% growth respectively. The main driver of this surprisingly resilient trend is unstoppable consumption estimates. However, there are significant clouds on the horizon for the American consumer.
We can’t forget that the consumption numbers have been relatively strong, but at the same time there has been a collapse in savings, with the personal savings rate dropping from 8.7% in December to a low 14-year-olds by just 4.4% in April.
The U.S. personal savings rate is now 3.3% below its pre-pandemic level and the University of Michigan consumer confidence fell in early May to an 11-year low of 59, 1, versus 65.2, deep in recession risk territory.
The fall in the savings rate is deeply worrying. This proves that consumers are suffering from high inflation while real wages remain in negative territory. From April 2021 to April 2022, real average hourly earnings fell 2.3%, seasonally adjusted, according to the Bureau of Labor Statistics.
Compare these two figures with real average incomes down 2.3% and the household savings rate almost halved. Families are struggling, wages are being dissolved by inflation, and savings are being wiped out. Consumer credit card debt is near historic highs. Balances reached $841 billion in the first three months of 2022, according to data from the Federal Reserve Bank of New York.
The astronomical level of credit card debt comes just as rate hikes are beginning to have a significant impact on families’ ability to repay their financial commitments.
Despite the perception of a strong economy with a tight labor market and rising nominal wages, the reality in the United States is that massive deficit spending and inflationary policies are hurting the middle and working class. Unemployment may be low, but employment-to-population and labor force participation rates remain low, and the so-called “great quit” begins to reverse as citizens are experiencing financial difficulties.
It seems very hard to believe that consumers will end fiscal 2022 with current levels of consumption growth, but the real challenge will appear in 2023. The buffers that families and businesses built in 2020 are all but gone.
In the other G-4 economies, the situation is no different. With the latest available data, the household savings rate in the eurozone, Japan and the UK has fallen below pre-pandemic levels, according to JP Morgan.
The key is inflation. If consumer prices continue to be high in the third quarter, it is very difficult to believe that citizens will be comfortable depleting their savings to continue consuming at the same pace as in the first half of 2022. Families developed economies are unaccustomed to high inflation and seem to accept the prevailing view that price increases will subside over the next few months. However, this may be a bad idea. Food prices are at record highs, oil and gas prices are supported by geopolitical risks and low inventory levels and deficit government spending mean that the consumption of monetary reserves will continue to be extraordinary.
American families may have been patient in recent months, but they can’t work miracles. If inflation persists, the evolution of real wages and savings will inevitably lead to a fall in demand and a higher risk of recession.