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President Joe Biden has tried to sound positive about the United States economy. He told the American people that they are doing better than most other economies. He’s right, but that means little to most Americans. After all, they live here, not in another economy. And although they are aware that the economic conditions in the United States are better than elsewhere, they still suffer from inflation and may see obvious signs of economic weakness. Despite modest gross domestic product (GDP) growth in the third quarter, the consensus—of economists and the average man or woman on the street—is that this economy, if it isn’t already, will soon be in recession. The strain is evidently evident in household finances.
It is particularly worrying that people have started to spend more than their income growth. Normally, high levels of consumption are a sign of economic strength, but not when they threaten, as is currently the case, the financial strength of households. It’s easy to see why people spend faster than they otherwise would. Inflation at nearly 40-year highs provides everyone with a huge incentive to buy before prices rebound. The pressure is evident even with the races. With these prices increasing by more than 11% per year, households are only rational to stock up on non-perishable food and fill their freezers as much as they can. The incentive is even stronger when it comes to big-ticket items like cars, appliances, and what government statisticians call “durables.” With new car prices rising around 9.5% a year, stretching out to buy a year earlier than you could is almost like getting a 10% discount off the price you are. likely to pay if you wait.
But while such a rush to spend is rational, it is also destructive. According to the Commerce Department’s Bureau of Economic Analysis, consumer spending has grown at an annual rate of nearly 8% since January, but personal incomes have only grown at a 5.5% rate. Such a difference cannot persist for long.
Already, signs of financial distress are evident. According to Federal Reserve, levels of household revolving credit – mainly credit cards – have accelerated significantly. This debt burden increased at an annual rate of 18.1% in August, the most recent month for which data is available, well above the 8% growth rates recorded in the same period last year. last. Measuring the same phenomenon in a different direction, the Commerce Department reports a significant slowdown in the household savings rate. Money flows to savings are down 25% from where they were at the start of this year. As a percentage of after-tax income, savings flows fell from 4.7% last January to just 3.5% in August, the most recent month for which data is available. Of course, money always flows into savings. The wealthy still have a surplus with which to add to wealth, but the sharp downturn means many middle class and certainly low-income Americans have already given up on saving.
Given that households are already maintaining spending rates above income growth, future reductions in consumption are all but assured. Growing indebtedness and lack of savings will further limit the ability to spend. The inevitable consumer spending cuts will lead to layoffs, and the concomitant loss of that income will further limit spending. Given that consumer spending makes up about 70% of the US economy, these cuts will all but ensure a major recessionary push in the months and quarters ahead.
These questions raise a second, more fundamental concern. High levels of household debt will compete with businesses for the credit they need to invest in new facilities and thus increase the productive capacity of the economy in general. The slowdown in the flow of household savings will aggravate the problem. Particularly because the Federal Reserve’s anti-inflation campaign is limiting the rate of new money creation, the financial system will depend more than usual on household savings to get businesses the credit they need to grow. . It looks like the funds won’t be there.
A widely accepted rule of thumb is that the two quarter or real declines in national GDP in the first half of this year signal that the economy is already in recession, although the modest growth in the third quarter muddies the picture somewhat. While some refuse to recognize these clear signs of weakness, the deterioration in the state of household finances suggests – and strongly – that the economy will soon be in recession. And if the bad news from the first half actually signals that a recession has already begun, then the picture depicted here suggests – just as strongly – that the recession will drag on into 2023. With inflation still raging, this coming year may well deserve the “stagflation” descriptor.
The opinions expressed in this article are the opinions of the author and do not necessarily reflect the opinions of The Epoch Times.
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