Six Catalysts For ‘Atlas To Fall’

If there’s one thing you can depend on in a world where everything’s amiss, it’s the US consumer.

America’s spendthrift ways are the stuff of legend, an ironic outcome for a nation founded on the pithy aphorisms of Benjamin Franklin who, as Jack Weatherford put it, “believed the world would be a far better place if everyone produced more and consumed less.”

Centuries on, Franklin’s portrait is a symbol of America’s financial prowess and consumerism taken to its illogical extreme. Franklin famously said that only two things are certain in life: Death and taxes. Today, we might add America’s propensity to keep spending money adorned with his visage, come hell or high water.

However, many Americans haven’t faced the kind of inflation currently plaguing the US economy in their lifetimes, and it’s unclear how much longer purported “buffers” built during the pandemic will last, especially considering much of the excess cash parked in savings accounts and money market funds belongs to the rich, whose marginal propensity to consume is the lowest.

In short: The threat of consumer retrenchment hangs over the world’s largest economy like stale cigarette smoke, and with real wages deeply negative, it’s entirely possible that spending will falter, pulling the rug just as Fed tightening turns the screws on the vaunted “wealth effect.”

In his latest, BofA’s Michael Hartnett identified a half-dozen “catalysts for Atlas to fall,” where Atlas is the US consumer.

The bulk of the binge is behind us, he said, noting that spending is up nearly 40% from the pandemic nadir. That, as sentiment continues to hit decade low after decade low (figure below).

Sequentially, BofA sees evidence of “deterioration,” Hartnett said, noting BAC total credit card spending is just 3.2% higher over the past year and down nearly 5% in real terms.

Recall that real personal spending fell twice as much as expected in February, underscoring flagging sentiment in the face of rapidly increasing prices.

Hartnett also said the best of the labor market recovery is almost surely behind us. Jobless claims can’t really fall much further and payrolls have posted so many solid monthly gains that diminishing returns from here are a near certainty (figure below).

BofA went on to reiterate that six of the last eight recessions have been accompanied by negative real wage growth, and noted that stimulus payment which totaled some $2.8 trillion in 2021 will be a relatively minuscule $600 billion this year.

And then there’s housing. I’ve spilled gallons upon gallons of digital ink suggesting the combination of rising mortgage rates, record prices and soaring costs for food and fuel will invariably weigh on the market. The Fed’s efforts to rapidly shed MBS from their $9 trillion balance sheet will exert extra pressure (figure on the left, below).

“Housing is weakening,” Hartnett said, flatly, noting that mortgage rates are near 5% (figure on the right, above), refi activity is down 75% from the February 2021 highs and purchases are down more than 25% from levels seen 15 months ago.

Finally, he wrote, the savings rate is below the average in 2019. Any remaining “excess” is “with the rich, not the poor,” Hartnett remarked.

As for what to watch, Hartnett flagged the leisure and entertainment ETF (PEJ), which is still loitering near 2018 highs, while sitting some 13% from its all-time peak. If it holds up, that’s a “sign that the goods-to-services transition” is ongoing and that a consumer recession may be “priced-in too quickly.” If it breaks down further, Hartnett warned “EPS and GDP forecasts will quickly follow.”