Market Commentary: Resilient Consumer

Learn more by watching this short video by Ara Abrahamian, CRPC®.

Even as recession talks have grown louder by the day, the U.S. consumer has been resilient throughout. While I don’t doubt that we could be in the midst of a recession, some indications show that things may not be as bad as they seem.

The tricky part of this equation is inflation. If inflation remains near its current level for the remainder of the year, we will likely experience a prolonged economic slowdown, which would probably lead to a longer-term recession.

The reason the U.S. economy has been so resilient thus far is, in part, because the average U.S. consumer is in much better financial shape today vs. the Great Financial Crisis (2008) and the onset of the pandemic (2020). While we are not out of the woods by any stretch, there are some positive signs to take note of.

Debt

Debt is a crucial metric to watch. Having too much of it is not a good thing. However, a moderate level of debt is healthy and needed. For the economy to expand, we need consumers to borrow to buy bigger-ticket items, such as cars or houses.

The problem arises when lending standards loosen and consumers leverage up on too much debt. This debt level can be a ticking time bomb. The margin for error is slim, and any economic downturn will likely lead to a spike in defaults.

Historically, household debt, which includes consumer and mortgage debt, has averaged ~11% of income. While it has crept up since early 2021, both consumer and household debt remain well below their peak levels, which is encouraging. An increase was to be expected since little spending or borrowing occurred during the onset of the pandemic.

With the Federal Reserve aggressively raising interest rates to combat stubbornly high inflation, we could see household debt level off, as consumers may be inclined to take on less debt at higher rates.

Job Openings

Unlike what we experienced in 2008, the number of job openings has climbed rapidly. While it’s true that we have also experienced a rise in the number of people quitting their jobs, the trend remains positive.

On average, there have been roughly two job openings for each one that is lost. Currently, we are at a ~2.6-to-1 ratio, which is the highest level in the past two decades!

The number of job openings has just started to slow, but this should not come as a surprise. It will likely decline in the coming quarters as higher interest rates work their way into the global economy. The fact is, we are still far above the historical averages, and that is a good thing.

Consumer Spending

Perhaps the most impressive data point is just how resilient consumer spending has been. In the face of higher interest rates and 40-year-high inflation, consumer spending remains strong and well above its average growth of 4.8%

While retail sales have slowed over the past few quarters, they remain comfortably above the long-term average and show how resilient the consumer has been. Some of this can be attributed to how much money was “saved” during the pandemic and is now working its way back into the economy.

The true test will come over the next few quarters as we see what kind of an impact higher interest rates have had on the global economy. We need to watch this impact closely with hopes that inflation starts to subside and provide the consumer some relief.

Consumer Price Index (CPI)

The CPI is the most important figure to watch over the coming months. If the economy is to avoid a recession, we likely will need to see CPI slow. It is difficult to envision the consumer remaining this resilient in the face of stubbornly high inflation.

While we have been able to take inflation in stride so far this year, there is only so much that can be endured before it starts to negatively impact the global economy. 

While CPI currently sits at a 40-year high, there are hopes that the worst is behind us. The recent decline in commodity prices is one reason to be cautiously optimistic.

While higher rates will no doubt impact and slow economic growth, things aren’t as bad as they seem. The big wild card remains the Consumer Price Index. If CPI shows signs of slowing over the next few months, that will allow the Federal Reserve to slow the pace of future rate hikes, giving the economy a much-needed shot in the arm.

Stay tuned …

Learn more by watching this short video by Ara Abrahamian, CRPC®.

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