It is easy to explain what could tank the economy in the not-too-distant future. To fight inflation, the Federal Reserve is hiking interest rates, and when the Fed starts pumping the brakes, a recession often follows. Russia war’s in Ukraine, ongoing supply-chain crunches, covid-19 flare-ups and the end of $5 trillion in federal pandemic aid all add strain to an already jittery situation.
Less clear-cut is how to save the country from recession when the United States appears to be returning to a have/have-not economy.
The most straightforward path to avoid a recession is for Americans to keep spending. Voters might not like today’s economy and high prices, but they have boosted their spending every month this year. Luxury brands and stores such as Nordstrom that cater to higher-end shoppers are doing especially well. So is anything related to travel: Flights, hotels and destinations such as Disney theme parks are thriving in what’s been dubbed the summer of “revenge travel.” Even some cruise lines are reporting record bookings.
“If the consumer is not pulling back, you don’t get a recession,” says Joe Brusuelas, chief economist at the tax and consulting firm RSM. “The real economy continues to do very well.”
There’s a lot of money in people’s hands, which is helping to sustain spending. It is unusually easy to get a job — and a pay raise. Many Americans were also able to save more over the past two years because they weren’t going out much and many received pandemic stimulus payments and other aid. Oxford Economics estimates households saved an extra $2.5 trillion since the pandemic began and only $40 billion has been spent so far. It’s an extra cushion against rising prices. Companies and state and local governments are also sitting on a lot of extra cash they could spend or return to shareholders and residents.
But while spending overall remains strong, not everyone has money to shell out. Walmart shoppers are cutting back on everything but food and other basics. It’s a similar story with savings. Even after the stock market dip, the top 40 percent still have lots of excess cash. Meanwhile, the savings that the bottom 20 percent accumulated over the past two years is already gone, Morgan Stanley has found.
Hourly workers typically go into survival mode during periods of high inflation. They struggle to keep up with increased costs for gas, food and rent, and there is little superfluous spending they can cut. As the economy slows, they are likely to see their bargaining power diminish and their hours scaled back in some industries.
For now, the wealthy continue to make big purchases, and it’s enough to keep the overall economy afloat. But that spending could also evaporate quickly. Look at the real estate market. Almost overnight, frenzied bidding wars stopped and home sales dried up this spring as consumers finally balked at high prices and rising mortgage rates.
No question, the U.S. economy is undergoing a big shift — actually, multiple shifts. There’s a triple pullback of government support: The Fed is raising interest rates and stopping its bond buying program, and overall federal spending is declining.
At the same time this aid is disappearing, Americans are changing their habits. After two years of mostly staying at home and spending big on goods, they are venturing out again and spending on services. We’re going from the Netflix economy to the Night Out economy, and retailers such as Target admit they have been shocked at how fast spending patterns have shifted.
Transition periods are always hard, and this one is especially difficult to read. How long will consumers keep spending? Are families simply shifting their spending from home renovation and backyard fun to eating out and travel? Or might consumers soon close their wallets? If the stock market and home prices decline this summer, how much will that dissuade consumers from continuing to spend down their cash on hand?
As recession warnings pile up, it is important to keep in mind what matters to the real economy: hiring and consumer spending. It’s fine — even preferable to the Fed — for hiring and consumer spending to downgrade from strong to solid.
As long as the rich and upper-middle class continue to spend, there probably won’t be a recession. But that doesn’t mean the economy will feel good to many, if not most, Americans.