There's just one thing keeping the US economy afloat: You.
Interest rates are higher and so are prices, credit is drying up and there are signs that the labor market is finally softening. But Americans keep on spending lots of money, and as long as that continues, the chance of a recession remains low.
The problem is that no one, not even the Federal Reserve, knows how much longer the American consumer can keep on spending.
What's happening: The US economy expanded at a much faster pace in the first three months of the year than previously estimated, the Commerce Department reported last week. And 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.
In theory, if people spend money, companies can keep employees in their jobs, and those workers then also can keep spending — it's the circle of (economic) life, if you will.
Over the pandemic, historic levels of stimulus cash boosted household income significantly. Spending, meanwhile, was severely curtailed as the economy shut down. Personal saving rates soared as a result, with US households amassing about $2.3 trillion in savings in 2020 and through the summer of 2021, according to Federal Reserve economists. That's about $2 trillion more than they would have saved under normal circumstances.
Now, two years later, we've done a 180. Americans are actually spending more than they normally would — using up their savings and even taking on more debt. Economists know that savings must be dissipating, but haven't quite figured out just how much of that money is left.
In a recent report, the Federal Reserve Bank of San Francisco found that Americans still have excess savings of about $500 billion. It expects that money will last "at least until the end of this year."
So recession worries are on hold until 2024. Well, maybe.
Just a few weeks later, economists at the Federal Reserve Board of Governors in Washington said just the opposite. US households have already gone through all of their excess savings, according to their research.
"While accumulated excess savings during COVID-19 were unprecedented in size, they have been unwound in the United States," they found.
Why it matters: Fed economists will need to come to some sort of agreement soon -- the outlook for consumer spending is directly tied to whether the Fed hikes rates once, twice, or even three times more this year.
"This debate is very important as we discuss when the US consumer will run out of excess savings and when the higher Fed funds rate will begin to meaningfully slow down credit growth and hence consumer spending," said Torsten Slok, chief economist at Apollo Global Management.
Consumer spending rose 0.5% month-over-month in April, after taking inflation into account. That beat analyst expectations, and points to consumer endurance in the face of rising prices, tighter credit conditions and heightened economic uncertainty, said Lydia Boussour, senior economist at EY-Parthenon.
"Households are still spending, but cracks in the foundation are increasingly apparent in the form of rising debt burdens and an increasing number of delinquencies," she said. "With hiring prospects softening and credit conditions tightening, elevated prices could become prohibitive."
Resilient consumers are typically a good thing. But when the Federal Reserve is actively trying to squash high inflation rates, consumer strength may be precisely what's prolonging inflationary pressures, said Boussour.
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