The strength of the US economy rests on the shoulders of consumers. If people are spending money, companies keep employees in their jobs ... and those workers keep spending. In theory, anyway.
Consumer spending accounts for about 70% of America's gross domestic product, the broadest measure of the economy, so it's nearly impossible to enter a recession when spending is growing.
That's why Wall Street is already fretting over Friday's retail sales report, which is expected to show that the mighty American consumer is pulling back.
Economists forecast that retail sales fell 0.4% in March from the month before. But Goldman Sachs and Bank of America analysts say core sales — that's without autos, gasoline, and building materials — slowed by about 1%. In February, retail sales also fell by 0.4% from January.
The March data come just days after Federal Reserve meeting minutes revealed that central bank economists think the recent banking crisis will tilt the US into recession this year. This is the first time in the current yearlong rate-hiking cycle that Fed economists have forecast such a recession.
Bank of America credit card data shows that spending is cooling. After starting the year out strong, the bank's credit and debit card spending eased in March to 0.1% year-over-year growth, said analysts on Thursday. That's the slowest pace since February 2021.
A taxing problem: Still, the health of the American consumer is still relatively strong, the BofA analysts said.
While there was some fear that the banking sector stress would lead to fewer loans and slower spending, any possible drawback likely has little to do with the regional banking crisis, said the analysts.
Instead, they chalk some of March's weak data up to a lack of tax returns.
"The slowdown in Federal tax refunds in March, as reported by the Internal Revenue Service (IRS), contributed to the weakness in spending," they wrote.
The IRS issued $84 billion in tax refunds this March, about $25 billion less than they issued in March of 2022. That's about 1.5% of monthly disposable income, according to BofA analysts.
A look at the numbers: While American bank accounts are still fairly robust, they're beginning to dwindle. That's pretty concerning.
Consumers added a total of $398 billion in new debt during the fourth quarter of 2022 — the fourth highest build-up for that period in the past 20 years, and nearly 4.5 times larger than a year earlier, according to a WalletHub survey.
Bankruptcies are also piling up. US corporate bankruptcy filings hit a 12-year high in the first two months of 2023, with 183 companies filing for Chapter 11, according to S&P Global Market Intelligence data.
Party City, Avaya, mattress manufacturer Serta Simmons and Independent Pet Partners, a pet store retailer, have filed in recent months.
Bed Bath & Beyond, Rite Aid, Joann Fabric and other chains are also on bankruptcy watch, according to credit rating agencies. These companies have struggled for years and are most vulnerable to challenging economic conditions.
What's next: March retail sales are due out Friday at 8:30 a.m. ET.
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