“The best consumer news is behind us,” BofA’s Michael Hartnett wrote, in the latest edition of the bank’s popular weekly “Flow Show” series.
Less than 24 hours later, retail sales figures for December and the preliminary read on University of Michigan sentiment for January helped make the case. The US consumer faltered last month and inflation concerns are taking a psychological toll, Friday’s data showed.
Hartnett proceeded to regale market participants with a tale of three recessions. The first, as alluded to above, is a consumer recession, brought on by inflation annualizing 9% and an erosion of purchasing power despite surging wages (figure below).
Real earnings dropping 2.4% is “synonymous with recession,” Hartnett said, citing 1974, 1980, 1990, 2008 and 2020.
This year, stimulus payments are set to “evaporate,” he went on to warn. Transfers to households were $2.8 trillion in 2021 on BofA’s math. That’ll drop to $660 billion this year.
Further, Americans’ “buffer” is dwindling, with the savings rate now below 2019. Hartnett cited November’s record $40 billion MoM increase in US borrowing (red bar in the figure, below) as evidence that the “consumer is starting to feel the pinch.”
Note that the rise in revolving credit (almost $20 billion, represented by the neon green line) was also a record and by itself nearly matched the Bloomberg estimate for the total increase in borrowing.
According to Bloomberg Economics, households making less than $90,000 per year will likely have “exhausted” financial buffers by next month.
BofA’s Hartnett also predicted a recession for small businesses. “The number of small businesses saying inflation, labor costs or poor sales are the #1 problem is the highest since 2010 [and that] historically coincides with recession,” he said, in the same Thursday note.
Finally, Hartnett spoke of a profit recession. He cited the bank’s global EPS model, which now “predicts a marked deceleration from 40% last summer to 5% next summer [and] could turn negative in H2.”
As for stocks, Hartnett noted that BofA “continue[s] to think the S&P 500 test[s] 4,000 before 5,000,” on EPS below $200 and a sub-20x multiple.
All of that, and the Fed is supposed to squeeze in three, four or perhaps even five rate hikes in 2022.
I’m thinking another huge team Biden blunder was renominating Powell to head the Fed…Biden had a opportunity to tie Powell to Trump and have a political scapegoat for Inflation because of the overzealous and inordinate market monetary accommodation that helped contribute to the inflation equation, as well as massive wealth disparities among the populace, …see today’s gods in space…
Newsflash the Fed is not going to be able to hike 3, 4, or 5 times- at least in my view. I heard bonds sold off on Waller’s interview. I watched the interview later. Sentiment in bonds must be lousy. Waller came off as decidedly neutral. The Fed is not going to be tightening policy all that quickly- Running down the balance sheet is not a done deal so soon. March probably is a lift off but after that the odds of further tightening become an even bet at least for awhile. All the bond hawks are likely to have egg on their faces in about 5 months. I am going to wait for the admission- but that will be like waiting for Godot. Ok, Larry, Muhammed, Henry K et al? GDP numbers are facing a pretty big post Christmas mark down.
April tax receipts will buy the government some time – pushing further into 2022 the time when the government deficits require more debt to be issued in order to pay the bills. We will see what interest rates are then and what the Fed is saying about rates and their balance sheet then…
Interesting point. As with so much in 2022, the tax receipts story this time around is different from the 2008-2009 tax receipts situation after the inglorious end to The Goat Moderation.
Thanks to WallStreet’s massive federally sponsored profits bonanza and some quick thinking by nimble blue-state lawmakers with fresh SALT stinging their Covid-19 wounds, “New York State Tax Receipts Surge to $12.9 Billion Over Forecast … New York ended the third quarter with a $30.7 billion surplus, $15.2 billion higher than the latest projections and $14.1 billion higher than last year at the same time.” — Bloomberg.com, January 15, 2022, 11:16 AM MST. Score: Trump Orangeskins 0, NY Looperholers 1!
“Tax receipts fell off during the recession [2009] but started setting new records by FY 2013.” The estimated tax receipts for 2021 are $3.86T versus $3.71T for 2020 versus $3.46T for 2019. — https://www.thebalance.com/current-u-s-federal-government-tax-revenue-3305762
Have a hard time getting the image out of my head of a guy scooping up a bucket of water from the deep end of a pool and next running down to the swallow end of the pool and pouring it back in, then, congratulating himself on making the shallow end deeper and the deeper end shallower. But, I’m not and never have been an Economist. They tell me I’m lucky. Or maybe they meant they were lucky when they said, “lucky for us all Hungry Worm you are not an Economist!” IDK.
With this post, I master the Recent Comments stack !
H-Man, consumer recession is the front runner. Realistic forecast with a high probability assuming the consumer leaves the party which looks like she is moving for the door right now.
That’s the big question for the market isn’t it. It’s hard to shake the idea that the consumer has to pull back this year.
I’m involved in a building project now and the basic materials are way up in price, the more expensive items are unavailable and the trades are booked months out (they also complain of not being able to find help for good paying jobs). Where does that lead us economically. It certainly feels impossible to forecast with much certainty. Time to increase hedging or step back from the table.