Economic News
Consumers Drove the Economy Hot, But Set to Weaken in 2023
For a year that promised a return to routine, 2022 delivered lots of curve balls to the American consumers.
Supply chains remained in disarray as ongoing snarls were exacerbated by Chinese lockdowns and Russia’s invasion of Ukraine, average US gas prices soared to levels not seen since the early 1980s, and interest rates quickly soared as the Federal Reserve dug in its heels and took a whatever-it-takes approach to rein in soaring prices.
Consumers armed with plenty of pandemic-induced pent-up demand and ample bank reserves kept the economy spinning throughout the majority of 2022. According to the Bureau of Economic Analysis, spending stayed above 2021 levels in November, coming in at 2%.
“Most people’s finances are probably better than we give them credit for,” says Ted Rossman, senior industry analyst at Bankrate. “However, I believe there are reasonable concerns that may not last.”
Consumer expenditure was stable for the majority of 2022. However, persistently high inflation has taken its toll, eroding the financial cushion. With interest rates set to rise in 2023 and economic instability on the rise, consumers may run out of cash at the worst possible time.
“A lot of folks have been able to stay up with their payments and save more; it’s just a question of ‘where do we go from here?‘” According to Rossman.
That might change rapidly if the historically low jobless rate rises, as the Federal Reserve and experts predict.
Resumption of pre-pandemic levels
During the pandemic, Americans’ personal savings rate reached an all-time high as many locked-down workers saved on the cost of their daily commute and other expenses and benefited from government handouts intended to promote spending. However, the household savings rate is now at 2.4%, the lowest since 2005 and the second-lowest in more than 60 years.
According to Federal Reserve data, household financial obligations (i.e. debt) as a percentage of disposable personal income reached an all-time low of 12.57% in the first quarter of 2021. As consumers rely more on credit cards and other forms of borrowing, that share has risen to 14.49%, significantly below the 40-year norm.
According to Federal Reserve data, credit card delinquencies were near historic lows as of September 30, with a 2.07% rate. That rate, however, is higher than the prior quarter and was achieved at the fastest rate on record, according to Fed data dating back to 1991.
Auto loan delinquencies, which had fallen to their lowest level since 2003, are rising to pre-pandemic levels; nonetheless, they are rising faster than they have in the previous nearly 20 years.
“Auto delinquencies appear to be the most troublesome area right now, more so than credit cards and mortgages,” Rossman added.
The major issue with vehicle loans is that the price increase [during the epidemic] caused many to overspend. He said that rate hikes haven’t helped.
“We’re seeing more people take out loans with $700 or $800 monthly installments and terms of five, six, or seven years,” he said. “It appears that many people have already over-extended themselves on this, and this appears to be leading to increased concerns about delinquencies and defaults, particularly in the auto industry.”
According to Edmunds.com, the average monthly payment for a new automobile was $703 in the third quarter, up nearly 26% from 2019.
Although delinquencies, defaults, and repossessions are rising from historic lows, they are not likely to reach “red-alert levels,” according to Jonathan Smoke, chief economist at Cox Automotive.
“The true worry in the market right now is a recession, not a wave of repossessions,” he wrote last week in a blog post. “We had anticipated an increase in loan defaults and repossessions, but long-term projections through mid-decade (2025) indicate that overall defaults and repossessions will remain within expected norms.”
Balance sheets are beginning to contract.
According to Rossman, the pendulum is swinging back from a point where many of these indicators were artificially low.
“Things don’t feel great with high inflation and higher interest rates, and it’s not ideal that the saving rate has dropped to only 2.3% at the present; but in terms of money that some individuals have in the bank, it’s a lot more,” he said.
Pandemic help, along with a sharp reduction in consumer spending during the pandemic’s peak, caused people’s savings accounts to expand. Fed economists anticipated that between 2020 and the summer of 2021, US households saved $2.3 trillion more than pre-pandemic trends. According to JPMorgan Chase, consumers have been draining those coffers to the tune of $1.2 trillion to $1.8 trillion.
“That trillion and a half dollars will run out some time mid-year next year,” JPMorgan Chase CEO Jamie Dimon said earlier this month on CNBC, warning that inflation is “eroding” the savings pile.
And, according to Rossman, Americans’ reliance on credit cards and other forms of financing, such as “Buy Now, Pay Later” installment loans, is expanding.
“[BNPL] may feel better than a credit card since it has a cheaper interest rate and a shorter period, but it may also tempt you to splurge,” he explained.
The forecast for 2023 is becoming bleaker.
Headwinds are gathering, which might put a damper on household spending, which accounts for the lion’s share of the US economy.
“The major engine of US growth — the consumer — is still operating, but three critical variables imply it will lose significant speed as we approach into 2023,” wrote Gregory Daco, EY Parthenon’s senior economist, in a note earlier this month. “First, the soft income trend will deteriorate more in 2023 as compensation and employment growth slow. Second, the so-called “savings slump is unusual and unsustainable. Third, the credit binge poses a genuine risk, particularly for lower-income households.”
According to EY Parthenon, consumer expenditure will level off in 2023 after increasing 2.7% this year. According to Daco, persistent inflation, tighter financial conditions, and a weaker global economy could tip the US into a mild recession in the first half of the year.
“With record low household sentiment and savings cushions rapidly diminishing, consumers will likely grow increasingly hesitant to spend in the coming months,” he said. “This will become clearer if labor market conditions deteriorate and household wealth is eroded by dropping stock prices and home values.”
But, while consumers are resilient, they are also restrained, according to Matt Kramer, national sector leader of consumer and retail for KPMG.
Consumers are “certainly making difficult decisions [and] pausing on the larger cost goods,” focusing on non-discretionary products, he said.
Among the changes he’s made are buying fewer gifts and looking for ways to save money. This frugality has extended to the buying of necessities. Discount stores like Walmart and Dollar General have reported an increase in wealthy clients.
“We may have a story of two years by 2023, with the first half being a bit challenged by economic headwinds but coming out of it in the back half with things looking more favorable and consumers being a little bit more eager to spend with the bright outlook that’s ahead,” Kramer said.
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