Americans spending their savings could spark a recession

Rising salaries and a “cash buffer” Of savings that was built up during the pandemic—when spending slowed and benefits like stimulus checks and enhanced unemployment boosted incomes—have provided consumers with “unprecedented spending power,” Liz Young, the SoFi’s head of investment strategies, said that SoFi is an online bank. But data shows many Americans Financing has been started their Neue spending Credit cards and draining habits their savings As the cost of living rises, so has this trend. Many experts are concerned about the impact on our ability to live comfortably. a spending slowdown—or even a recession—could Be on the horizon.

“My intuition and common sense says there’s not a bottomless pit of savings to support this level of spending, and there’s not a bottomless pit of wage growth to keep it elevated enough to drive GDP indefinitely,” Young wrote in a Thursday article. “Time will tell, but I still believe something’s gotta give.”

U.S. consumers’ credit card balances jumped 7% in the fourth quarter of 2022 to a Record breaking record of $986 billion a New York Federal Reserve report This week, it was revealed. Morgan Stanley estimated that in the last year, consumers spent about 30% of the excess $2.7 trillion. savings They grew during the pandemic and lower income consumers tapped closer to half of them. 

“At the pace of spending we anticipate, savings are on track to dwindle rapidly,” the investment bank’s economists wrote in a January 24, note, which argues that consumers will continue to spend $500 billion more their Pandemic savings By 2023

Americans’ ailing savings Accounts and greater reliance on credit card are more likely to lead to consumer bankruptcy. spending—which represents 70% of U.S. GDP—to slow this year. Some economists, such as Ataman Ozyildirim (senior director of economics, The Conference Board), are concerned about leading indicators like credit conditions and manufacturing orders. a Believe, a non-profit research organisation a recession This is a given. 

“Indicators related to the labor market—including employment and personal income—remain robust so far. Nonetheless, The Conference Board still expects high inflation, rising interest rates, and contracting consumer spending to tip the U.S. economy into recession in 2023,” He wrote Friday.

Contrary data recession Fears

This year, even experts in economics are confused because of conflicting data on the U.S. consumer’s health. 

Retail sales saw a sharp rebound in January after falling for the second consecutive month. Bank of America Institute researchers reported that they discovered “signs of a strengthening in consumer spending at the start of this year” a Neue reportNoting that debit and credit cards are available spending In January, the average household saw an increase of 5.1% over the previous year.

U.S. economic growth also saw 517,000 new jobs added last month. This increased the unemployment rate. a A 53-year low at 3.4% has been reached; Social Security payments have increased dramatically in the last year, and the minimum wages have increased. jumped You can find it in different areas of the country. 

“The still-strong position of the labor market in January confirms that households and the broader economy are still in relatively firm standing,” Cailin Bich, global economist, Economist Intelligence Unit EIC, research and analysis section of Economist Group told The Sunday Review. 

The Bureau of Labor Statistics released Tuesday’s report that showed year-over-year inflation as calculated by the consumer price index fell to 6.4% from 9.1% in June. Goldman Sachs reduced its expectations for the probability of inflation falling due to ample employment and low levels of inflation. a U.S. recession Last week, 35% to 25%

Recent positive economic data contradicts this. a number of other statistics that indicate consumers’ ability to keep spending At higher levels, it is declining. 

While inflation has fallen, the high cost of living is still a problem Americans All income levels. More than 80% of households with middle incomes cut back on their savings Or pulled money out of existing savings Primerica, a financial services firm that helps people make ends meet over the final three months in 2022 is a good option. found a new study.  Gregory Daco is chief economist of EY-Parthenon. told the Financial Times Lower-income families are spending all this week their Pandemic savings And it began “dipping into” Keep checking back regularly savings. 

Nearly 65% overall Americans The end of 2022 saw 9.3 millions more people living paycheck to paycheck than they did the previous year. According to a Neue report From PYMNTS or LendingClub Then there’s the personal savings rate—which meAsures Americans savings as a percentage of disposable income—has fallen from 9.3% in February 2020 before the pandemic, to just 3.4% in December.

Ted Rossman from Bankrate’s senior industry analyst warned, “This is not the end of it.” Americans Much of it is being funded by their spending Credit card debt. In the fourth quarter, total household debt rose 2.4% a Record $16.9 Trillion, thanks to rising a According to The, credit card debt rose 15% over the past year. New York Federal Reserve.

“Robust consumer spending, the hottest inflation readings in 40 years and sharply higher credit card rates have combined to push credit card balances to a new record high,” He said The Sunday Review Thursday was noted by 46% of credit cardholders that they now have credit card debt. This is compared to 39% a Year ago.

The ECI’s Birch warned that rising interest rates and high inflation are causing “increasing financial strain on households” as well, and she argues the trend won’t end anytime soon.

“As interest rates rise further in the coming months…this will cause consumer spending to slow considerably over the course of 2023,” She said.

That’s not great news, because consumer spending It is responsible for 70% U.S. gross domestic product, making it vital to the country’s economic growth. 

Jennifer Timmerman (Wells Fargo Investment Institute investment strategy analyst) even wrote a Note: This week’s title “What weakening consumer spending may be foreshadowing,” Alert: she’s already seeing fade spending Signs and symptoms of “financial stress” In homes that historically point towards a downturn.

“We believe that pressure on inflation-adjusted wages, along with the impact of Federal Reserve rate increases, will trigger an economic slowdown in coming months. Traditional recession signposts already are signaling as much,” She wrote it in a Tuesday Note

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