American Consumers Running on Savings and Credit Are Now Tapped Out

One conundrum of recent U.S. economic performance is that GDP has remained robust while signs of a recession and possibly a financial crisis keep accumulating. It’s like seeing snow on a sunny day.

U.S. GDP was 2% in the first quarter of 2023, 2.1% in the second quarter, and a strong 4.9% in the third quarter. The best estimate for fourth-quarter growth from the Atlanta Fed is currently 2.1%. If that figure holds, growth for the entire year of 2023 will come in around 2.8%.

That’s not too shabby, and it’s materially better than the 2.2% average annual growth from 2009 to 2019 in the ten-year period between the global financial crisis and the pandemic. In any case, it’s a far cry from a recession. Yet, the recession signs are real and growing worse.

These include credit contraction, rising bad debts, increasing jobless claims, collapsing commercial real estate markets, contracting world trade, inverted yield curves, and many other reliable technical indicators.

How can the bad news and good news both be correct? The riddle is solved by this report.

The economy has been propped up by the consumer. That explains the growth. But the consumer is on a non-sustainable path. That explains the warning signs.

The consumer came out of the pandemic with a head of steam provided by handouts from Trump ($2000 per citizen) and Biden (also about $2000 per citizen) between June 2020 and March 2021. That was supplemented by $900 billion of payroll protection plan loans, which were forgiven one year later.

Student loan payments were suspended from 2020 to 2023. The Federal Reserve held interest rates at zero from 2020 to 2022.

Then the misnamed Inflation Reduction Act of August 2021 handed $1 trillion of taxpayer money to green new scam businesses favored by the Democrats and other pet projects. With that money, Americans were able to pay down credit card balances and build up savings.

It was a powerful double-dose of fiscal and monetary stimulus. Much of this operates with a lag, so the growth momentum carried over into 2023. Now it’s all gone.

Interest rates are over 5%. Mortgage rates are over 7%. Student loan repayments have started again. There are no more pandemic handouts. American’s savings are depleted, and their credit cards are tapped out. Now the reckoning begins.

Again, these forces operate with a lag, so the recession trend may not overtake the growth trend until early in 2024 (if not already). Winter is coming.

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