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Pessimism prevails regarding the US economy. Wall Street executives, usually an optimistic bunch, are warning of a “very, very high risk” of a recession. Wells Fargo chief says there is “no question” the nation is headed for a downturn. The stock market has come dangerously close to a bear market. Top business leaders are as gloomy as they were when the pandemic began. Consumers are even more pessimistic. Americans are evaluating the economy just as badly as they did during the Great Recession, largely because of inflation at a 40-year high.
It’s easy to explain what could fuel the economy in the not-too-distant future. To fight inflation, the Federal Reserve raises interest rates, and when the Fed starts slamming on the brakes, a recession often ensues. The Russian war in Ukraine, ongoing supply chain shortages, the flare-up of Covid-19 and the end of $5 trillion in federal pandemic aid are all adding to an already jittery situation.
What is less clear is how the country can be saved from recession if the United States appears to be reverting to a have/have-not economy.
The easiest way to avoid a recession is for Americans to keep spending. Voters may not like today’s economy and high prices, but they’ve increased their spending every month this year. Luxury brands and stores like Nordstrom that cater to upscale shoppers are doing particularly well. The same is true of anything travel-related: flights, hotels, and destinations like Disney theme parks thrive in what’s been dubbed “Vengeance Travel.” Even some cruise lines are reporting booking records.
“Unless the consumer pulls out, there’s no recession,” says Joe Brusuelas, chief economist at tax and advisory firm RSM. “The real economy is still doing very well.”
There is plenty of money in people’s hands, which helps keep spending going. It’s unusually easy to get a job — and a raise. Many Americans have also been able to save more over the past two years because they didn’t run out much and received lots of pandemic stimulus payments and other aid. Oxford Economics estimates that households have saved an additional $2.5 trillion since the pandemic began, and only $40 billion has been spent so far. It’s an extra cushion against rising prices. Businesses, as well as state and local governments, are also sitting on a lot of additional cash that they could spend or return to shareholders and residents.
But while spending remains strong overall, not everyone has money to shell out. Walmart shoppers are discounting everything but groceries and other basics. It’s the same with saving. Even after the stock market crash, the top 40 percent still have plenty of excess cash. Meanwhile, the savings the bottom 20 percent have accumulated over the past two years are already gone, Morgan Stanley has found.
Hourly workers typically go into survival mode during periods of high inflation. They’re struggling to keep up with the rising costs of gas, groceries and rent, and there’s little waste to cut back on. As the economy slows, they’ll likely see their bargaining power wane and their hours in some industries scaled back.
For now, the rich continue to make big purchases, and that’s enough to keep the overall economy afloat. But that spending could also quickly evaporate. Look at the real estate market. Frantic bidding wars ended almost overnight and home sales dried up this spring as consumers finally shied away from high prices and rising mortgage rates.
There is no question that the US economy is in a major upheaval – actually in several upheavals. There is a triple withdrawal of government support: the Fed is raising interest rates and halting its bond-buying program, and overall federal spending is falling.
At the same time, that help is dwindling, and Americans are changing their habits. After staying mostly at home for two years and spending heavily on goods, they are venturing out again and spending on services. We’re moving from the Netflix economy to the Night Out economy, and retailers like Target admit they’ve been shocked at how quickly spending patterns have changed.
Transitional times are always tough, and this one is particularly difficult to read. How much longer will consumers spend? Are families simply shifting their spending from home renovations and fun in the garden to dining and travelling? Or could consumers close their wallets soon? If the stock market and house prices fall this summer, how much will that discourage consumers from continuing to spend the cash they have?
As recession warnings mount, it’s important to keep an eye on what’s important for the real economy: hiring and consumer spending. It’s okay – even preferable to the Fed – for hiring and consumption spending to be downgraded from strong to solid.
As long as the rich and upper-middle class continue to spend, there is unlikely to be a recession. But that doesn’t mean the economy will feel good for many, if not most, Americans.
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