Are We Inching Closer to a Recession?
- by Brandon Michaels & Chris Adnams
A combination of historically high inflation and one of the quickest and most severe periods of rising interest rates have brought on fears of a pending recession. Throughout 2022 and now into 2023, economists continue to make projections of “soft” or “hard landings” six to twelve months away and yet time goes on and the recession is still no closer. This prolonged period of limbo is a result of heightened consumer spending buoying the US economy. Is it sustainable and what will happen if it goes away?
Elevated Consumer Spending
Following the re-opening of the economy from COVID-19, consumer spending has been on a meteoric rise, significantly outpacing the 2015-2019 consumer spending trend. In the past two years (April 2021 – April 2023), consumer spending, as measured by personal consumption expenditures (“PCE”), has risen 15.9%, an increase of more than double when compared to the two-year period preceding COVID-19 (2018 - 2019) where consumer spending increased 7.8%. While this increase in spending is typically a welcome sign of an expanding market, the percentages referenced do not account for inflation.
When comparing this data with real PCE, adjusted for inflation, the rate of increase in spending from April 2021 - April 2023 versus the two years before the pandemic, 2018 - 2019, is similar, around 4.5%. This means that the average consumer is having to spend a larger portion of their disposable income just to purchase the same basket of goods and services as before. So instead of heightened consumer spending being an indicator of a robust and growing economy, it’s what’s required to just break even.
Two factors threaten the long-term sustainability of this spending: a rise in personal debt payments and a reduction in the personal saving rate.
Growing Consumer Debt
From 2020 through the beginning of 2022, access to financing at incredibly low rates was abundant and new consumer debt soared in kind. In May of 2023, the Federal Reserve Bank of New York reported a US household debt balance of $17.05 trillion, a new record high, with more than $2.9 trillion added since the end of 2019. However, as the cost of debt continues to rise and lending conditions tighten, consumers face higher payments to service outstanding balances. From their low point in December of 2020, aggregate interest payments for consumer debt have nearly doubled to $448 billion.
Disposable Income and Saving
2020 and the first half of 2021 were marked by substantial government support and transfers: quantitative easing pumped up the available American money supply, PPP loans provided liquidity to struggling businesses, and federal and state stimulus support supplied immediate cash infusions to consumers all while discretionary spending was stifled by economic shutdown. During this period, Americans enjoyed an unusual abundance of disposable income and heightened savings rates. The savings rate rose to 33%, the highest level in history, creating a buildup of excess reserves.
At present, Americans are no longer afforded the luxury of a high savings rate. The personal savings rate has plummeted to 4.1% (a 28.9% decrease), well below its pre-pandemic average of 7.6%. Consumers are now using their excess savings to stopgap the difference. At its peak in August of 2021, its estimated U.S. consumers had an aggregate of $2.6 trillion in reserve savings. As of February of 2023, that balance stands at $1.2 trillion, a 53% reduction in only seven months.
The Pre-Recession Runway
Heightened consumer spending has been given a runway to continue, but this runway only lasts as long as excess savings are available. Rising debt payments and a weakened ability to save continues to reduce the reserve of savings. When the stockpile of available savings runs out, consumers will no longer be able to sustain current levels of consumption and spending without a considerable rise in disposable income or reduction in debt and interest rates. If consumers are forced to pull back on purchasing and make decisions about where to spend their money, that threatens a tenant’s ability to pay rent and a landlord’s ability to pay a mortgage, among other stakeholders. This outcome could spell trouble not only for commercial real estate but for the entire economy.