In the past two years, users have downloaded more than 2 trillion. dollars of savings built up during the pandemic to continue spending amid high inflation
American consumers are closing in on a painful balance sheet as the extra cash hoarded during the pandemic dwindles. How Americans react will determine whether the world’s largest economy can avoid a recession.
In the past two years, users have downloaded more than 2 trillion. dollars of savings accumulated during the pandemic to continue spending amid high inflation. This allowed the economy to continue growing even as the Federal Reserve raised interest rates at the fastest pace in four decades.
As the money supply shrinks, however, consumers become increasingly dependent on their wages to maintain their standard of living.
According to Wendy Edelberg and Sophocles Goulas of the Brookings Institution’s Hamilton Project, this “puts households at a crossroads” as they consider how to adjust their spending and whether to take on more debt. This is especially true for lower-income workers, who have fewer opportunities to adjust.
Economists disagree on how worried they should be. Some believe this strain, combined with other upcoming hurdles — such as the resumption of student loan payments in October for millions of borrowers — will lead to a recession. They argue that with expensive and hard-to-access credit brought on by the central bank’s measures, consumers will be forced to cut back on spending, causing the economy to shrink.
“More and more households will be forced to face their budget constraints,” said Jonathan Pingle, UBS Group AG’s chief U.S. economist, who believes a mild recession will begin by the end of this year. “This should be a negative factor for consumer spending,” he adds.
Other economists are more optimistic. They believe that declining inflation and a still-sustainable labor market are providing consumers with the means to continue spending even as their cash reserves dwindle.
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“Income growth is now stronger than inflation,” said Moody’s Analytics chief economist Mark Zandi. “Thus, the need for additional savings to support continued robust consumer spending is weakening,” he adds.
The mixed outlook was reflected in last week’s data. U.S. retail sales rose steadily last month, and Walmart Inc., Target Corp. and Home Depot Inc. reported profit that beat Wall Street estimates for the fiscal quarter ending in July. However, corporate executives expressed caution about the months ahead.
“There are reasons to be optimistic in areas like employment and wage inflation,” Walmart CEO Doug McMillan said on an Aug. 17 call with analysts. “There are other reasons for concern as consumer balance sheets potentially weaken over time,” he added.
Americans’ savings have soared during the pandemic, boosted both by government and other government aid and by limited spending on restaurants, vacations and the like. However, it is not clear how much of this money has not yet been spent.
In a speech in Sintra, Portugal, on June 28, Fed Chairman Jerome Powell said he probably has some reservations. He adds, however, that the “primary driver” of consumption and the economy is the strength of the labor market and the income it generates for workers.
In a more recent assessment dated Aug. 16, San Francisco Fed researchers Hamza Abdelrahman and Luis Oliveira wrote that additional savings built up during the pandemic are likely to be exhausted this quarter.
Citigroup Inc.’s senior global economist. Robert Sokin argues that this is too pessimistic. According to him, Fed researchers are overestimating how much money Americans want to set aside as savings on a regular basis. According to him, households still have about 1.4 trillion. dollars of extra cash they can use.
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That allowed consumers to continue spending amid tighter lending by the Fed, prompting the bank to delay the start of its forecast recession to the first quarter of next year.
However, lower-income households are already feeling the pinch. “The additional savings of the poorer half of the population have been nearly exhausted, and rapidly rising debt service costs are putting financial pressure on households,” Bloomberg Economics chief U.S. economist Anna Won and her colleagues wrote in an Aug. 14 note.
Consumer revolving credit has grown more than 10% in the past year as Americans have used their credit cards more often despite a big increase in the cost of these loans. Delinquencies on auto loans and credit cards have also increased.
According to Brookings’ Edelberg and Gulas, at least for now, these signs of trouble are not cause for alarm. But if financially strapped households piled up more debt, that would be more worrying, they said in a report this month.
“To some extent, we worry about households continuing to spend as much as they are now relative to their income,” Gulas said in an interview. “However, overall the economy is performing well in terms of job growth, so no it is clear whether we will witness a recession”, adds the economist.
Read more news at Bloomberg TV Bulgaria website
2023-08-20 15:40:00
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