Notwithstanding what, thanks to a Teflon labor market, is a bulletproof facade, the US economy is vulnerable.
You don’t have to look very far for evidence to support that contention. Business investment is faltering, consumption is slowing and although residential investment may rebound thanks to reinvigorated housing activity on the back of lower mortgage rates+, it’s been a drag for seven straight quarters.
Beyond that, lending standards are getting tighter. I touched on that briefly Thursday in the context of business loans. The figure below is just another way of showing the same dynamic, only on the consumer side.
Credit card standards are becoming more strict, and you can hardly blame banks: Credit card balances have ballooned by nearly a quarter trillion+ since inflation took off in the spring of 2021, and the savings rate is near a record low.
“Banks are now tightening lending standards across board, even with regard to credit cards,” BofA’s Michael Hartnett said, adding that an “ultra-low personal savings rate and ultra-high credit card spending are under threat.”
Payrolls are obviously strong, but the disparity with nominal spending is notable, although you have to torture the axes to see it.
“[It] likely won’t take much unemployment for the US consumer to provoke concerns of a hard landing,” Hartnett went on to say.
In addition to new extremes in the 2s10s inversion (fresh cycle low at -87bps on Thursday) and the signal from ISM (which, if it prints 45, would almost surely presage negative payrolls if past is precedent), the signposts aren’t hard to read.
And yet, until the jobs market cracks, the rest is a sideshow. Americans are spendthrifts. If they have jobs, spending may cool but it won’t crater.
Importantly, if inflation recedes enough to flip real wage growth positive, it’s not terribly difficult to imagine a latent recession getting delayed indefinitely, no matter what a bevy of purportedly infallible indicators say.
Regarding residential housing, Fannie and Freddie have started to tighten underwriting standards on ARMs(all ARMS 7yr and under). Currently to qualify on an ARM you must afford the payment 2% above the initial rate—which takes you above the current FRM rate. Also coming soon is F&F lowering the total DTI from 45% to 41% on ARMs. I know because I am going through the process. This will further deter more potential buyers. Any idea Mr H what percent of buyers are ARM buyers?
Anecdotally speaking, my real estate friend in NYC says “most” new purchases over the last 6 months have been financed with 5/1 ARMS, with the belief that future refinancing will be possible when rates come down. I wish those folks luck.
I am reading “The Myth of American Inequality” by Phil Gramm and 2 others ( an economist and a former senior leader at the Bureau of Labor Statistics).
One of the things that are not captured in a lot of the statistics that the US government releases is the quantification of transfer payments.
According to this book, here are the total incomes (including earned income, transfer payments and after taxes paid) followed by the amount of transfer payments included in the first amount from 2017, by quintile:
Bottom 20% $49,600, 45,389
Second 20%. $53,924, 29,793
Middle 20%. $65,631, 17,850
Fourth 20%. $88,132, 9,738
Top 20%. $197,034, 7,282
It is possible that the backstop of federal transfer payments for our economy is not being adequately considered in recession predictions.
One additional point- in the service industry, especially for at home care/services- this is largely a cash transaction which is not included in the above amounts. My 89 year old parents pay for the majority of their personal and household assistance in cash.
That book is a painstakingly ridiculous piece of absurd propaganda.
I did not say I agreed with the book- but I have no reason to doubt the statement that the government does bot include transfer payments when looking at wealth
For example- the authors left out passive income and capital gains- so I do not agree with their overall conclusion regarding the wealth gap.
@EN
Actually, transfer payments are not strictly wealth, they are income of some form. We can tell the effect on wealth by looking at savings rates. I am in the top income quintile and the only so-called transfer payment to which I am “entitled” is SS. I also get medicare but it does not constitute income and I never actually receive any cash from it. It pays bills I never receive so it’s not really in the wealth plus column. As to SS. I just started my 2022 taxes so I know the numbers. My gross SS last year was $26,100. However, $6,500 (25%) was taken away to pay my medicare premium, leaving $19,600, all taxable. I’m in the 35% bracket for the US and the top bracket in MO so take away another 43%. That leaves $8600 (or 32% of my gross payment), about what the book shows. The thing is, however, this is not an entitlement. Rather, it the rather reduced return, at no interest, of my share of an involuntary tax paid by me and my employer. I paid in the max every year for 40 years, as did my employer. I also paid self-employment tax for money earned in various side gigs. While that money goes into my SS tally sheet, it never counts in my qualified contributions and, thus, does not increase my benefits. I took SS at 62 to resist the effect of Republicans trying to take it away. That was 16 years ago and I have now received a total of ~380$ in gross payments, still, less than I paid in, not even counting my employers. And since I only got to keep at most $150K of that money, it hardly qualifies as an entitlement or wealth.
Employment is a lagging indicator. UE is always at cycle lows shortly before recessions start. “Shortly” meaning a few months. https://fred.stlouisfed.org/graph/?g=ZAqR I think a low UE level entering recession may help make the recession milder, but have no evidence of that.
Thank you for defining shortly. Nothing shows respect like clear communication…..