For the US economy to fall into a proper recession (as opposed to a “technical recession,” a distinction which suddenly matters), the consumer has to falter.
And, as it turns out, there’s evidence the consumer is faltering. Just not as quickly as you might expect given exceptionally onerous macro realities.
The consumption component of GDP weakened in Q2, the advance read on second quarter growth showed. The lackluster print followed a sharp downward revision to first quarter consumption. Still, real personal spending managed a gain in June after falling for the first time this year the prior month.
The fate of the economy depends on how much longer consumers can keep this up when real wage growth is deeply negative. Commentary from both Visa and Mastercard (on their respective quarterly earnings calls) suggested little in the way of a slowdown.
A pillar of all constructive takes on the outlook is the contention that Americans came into 2022 with savings “buffers” and “excess” cash. The veracity of such claims is virtually impossible to assess in a systematic way. It depends on income cohort and all too often, aggregates which appear to show the middle-class is flush clash with survey data suggesting at least some families from the same income buckets couldn’t fund a $1,000 emergency without borrowing.
Speaking of borrowing, an alternative way to monitor the situation is just to look at consumer credit. The monthly figures from the Fed aren’t adjusted for inflation, so it’s not a straightforward exercise. That said, it’s worth noting that total credit rose more than $40 billion in June, according to data released this week. It was the second largest monthly increase on record, eclipsed only by March’s $47 billion leap (figure on the left, below).
June’s surge was far larger than economists anticipated, which is notable given that forecasts reflect the expected impact of higher prices. Revolving credit jumped almost $15 billion, well below huge increases in March and April, but still very large (figure on the right, above).
This is the same story month after month. The optimists among you will say the US consumer is “resilient” despite rising costs. The pessimists will say Americans are running up debt to maintain lifestyles in the face of generationally high prices for everything from basic necessities to luxury items.
For now, both sides are partially correct. Eventually, though, one camp will be more right than the other. If it’s the pessimists, a recession is likely. “To maintain their pre-pandemic lifestyle, consumers have taken to their credit cards to fill the gap,” Bloomberg’s Vincent Cignarella said.
In a continuation of the trend, New York Fed data released this month showed a record number of credit card accounts for the second quarter (figure below), during which Americans’ card balances rose $46 billion.
At the same time, mortgage originations dropped to a new two-year low amid soaring rates.
“Although seasonal patterns typically include an increase in the second quarter, the 13% cumulative increase in credit card balances since Q2 2021 represents the largest in more than 20 years,” the New York Fed said.
The figure (below) illustrates what certainly could become problematic in a rising-rates environment. The 12-month change in Americans’ credit card debt was sizable, to put it mildly.
“This is a pace that simply cannot continue indefinitely,” Bloomberg’s Cignarella went on to say, in the same short blog post mentioned above, before warning that the Fed is “walking into a debt trap which will cool inflation and spending on its own.”
As for what happens if the Fed doesn’t heed that warning, Cignarella was pretty specific. “A recession and risk selloff are almost certain to follow as US consumers throw in the towel,” he remarked, suggesting the Fed might halt its tightening efforts after September amid what he described as “a disaster in the making.”
It’s funny: Looking back at the last article I penned documenting consumer credit trends in the US, I too used the word “disaster.”