Since late last year, the case for a 2023 recession has been that consumers would run out of spending power following a post-pandemic spending spree. That narrative has lasted so long that it's now the predicate of predictions for a 2024 downturn, after no 2023 dip materialized.
But those predictions look shakier after second-quarter profit reports came in, with companies including Amazon, Walmart and Home Depot beating profit forecasts. The case for the consumer is also bolstered by a range of other recent consumer statistics, from deposit levels at big financial institutions like Bank of America to GM car sales trends. They present a picture of the consumer economy that shows real incomes rising as inflation wanes, consumers still holding onto most of the extra savings they banked during Covid, and sectors including automobiles and services picking up the baton of consumer spending as growth in furniture, appliances and apparel remains weak after the Covid boom in goods purchasing.Â
"People were expecting a recession by now but the consumer has been resilient," said Arun Sundaram, a consumer-stock analyst at CFRA Research. "People thought spending would fall off a cliff and it didn't happen."Â
Indeed, the data point to rebounds in a series of economic stats that did make the case that a recession was likely roughly a year ago, in the third quarter of 2022. All of the data has improved this year, led by the steep decline in inflation. After the Census Bureau reported July retail sales rose 0.7%, both Moody's and the Atlanta Federal Reserve Bank raised their real-time tracking forecast for third-quarter growth this year.
The five big recession arguments pinned on the consumer haven't played out yet. Here's why.
The pandemic savings depletion isn't in the bank account data
Three rounds of Covid stimulus helped U.S. households save more than a trillion dollars, and despite inflation, a wave of home renovations in 2020-2021, and post-Covid "revenge travel" vacations, they still have most of it.
At Bank of America, the nation's second-largest bank, deposits are still 33% higher than in late 2019, immediately before the first Covid cases, chief financial officer Alastair Borthwick said during the company's second quarter earnings calls. To the extent consumers are drawing down savings, it appears they are doing so to reduce debt or move assets into the bank's brokerage business, he said. Â
"Average deposit balances of our consumers remain at multiples of our pre-pandemic level, especially at the lower end,'' he said.
Moody's says that consumer savings rates are rising after bottoming out in June 2022. At Bank of America, about 80% of the jump in deposits from 2019 to 2022 is still in the bank.Â
"Over one-and-a-half to two years, wealth is still up – but not as much as it was," said Scott Hoyt, director of economic research at Moody's Analytics. He estimated that the excess, most of it from stimulus money that consumers plan to retain as large savings, is as high as $1.5 trillion.Â
Consumers are carrying more debt, but not too much debt
At JPMorgan Chase, the biggest U.S. bank, consumer credit card balances per account are lower than in 2019, chief financial officer Jeremy Barnum noted on its recent earnings calls. Balances are up a little, but it's not a sign of consumer distress, he said. "It's more a wanting than a needing thing," Barnum said. "We still see it as a normalization, not a deterioration story when we talk about consumer credit.''
Headlines proliferated when U.S. credit card balances passed $1 trillion for the first time on Aug. 8, and credit card interest rates have hit near-record highs. But consumer loan delinquency rates are at 2019 levels, and below any level ever seen before 2014, according to Federal Reserve data. David Fieldhouse, Moody's Analytics' director of predictive credit analytics, says consumer debt growth is slowing down.
At JPMorgan, mortgage credit quality is so solid that the bank reported no net chargeoffs in the second quarter. The bank said it recovered a small amount of loans it had previously written off. Credit card chargeoffs rose, but remain below 2019 levels. Bank of America charged off 1.07% of all consumer loans in the quarter, still below pre-pandemic levels.
The percentage of household income needed to service debt is lower than at any time other than the stimulus period, according to Hoyt, who says that the macro data don't back up the picture of stretched consumers. "The trend is up, but slowly,'' he said. "Consumers can do their part to keep the economy moving.''
Federal Reserve data are slightly less rosy but broadly consistent: The 5.7% of household income needed to service debt is virtually identical to 2016-2019 levels. One reason: Most homeowners are not moving, choosing to keep their 3% mortgages from 2021 or earlier so their payments stay low.
Demand for goods hasn't all been met, especially cars
This is one of the stronger arguments for a consumer-led slowdown, but recent earnings reports show it has holes, the biggest one being the auto industry.
Retail sales reports do indeed show declines in spending on furniture and electronics since last year, which has shown up in revenue declines at Best Buy and RH, and even home-improvement giant Home Depot reported a same-store sales decline from last year, though a smaller one than Wall Street expected. Growth in apparel sales has been small, which Sundaram said hurt Target. Like other analysts, he says sales of goods used at home like electronics, and spending on home improvements, were pulled forward during the pandemic as people spent more time at home.
"How often do you replace a couch?" Sundaram said.Â
Where is the furniture and home improvement money going? To car companies, especially General Motors.Â
GM reported a 15% jump in U.S. unit sales to consumers for the second quarter (rival Ford reported an 11% gain, with F-Series pickup sales rising 34%). Overall, the Bureau of Economic Analysis says consumer spending on new vehicles rose $40 billion to $642.4 billion in the first half of the year, with most gains coming in the second quarter. And automakers report that consumers continue to choose more expensive, option-laden models.
Those gains have room to run because of pent-up demand, Moody's argues. U.S. vehicle sales last year were 3 million units below normal cyclical peaks.Â
The bigger question is what interest rates will do to the housing sector. Existing home sales have continued to drift lower this year, hurt by a reacceleration of mortgage rates this summer. While luxury builder Toll Bros. told analysts in June that its demand had begun to pick up, and D.R. Horton reported a 37% quarterly increase in net home orders in July, the impact of rates on construction and home buying is worth watching. Both stocks are up about 60% in the past year, while government data shows slow residential investment hurting economic growth – but much less than last year.
Inflation has pushed down real incomes, but the gap is narrowing
This is the heart of the consumer-led slowdown argument, and it was true for much of 2022 as inflation peaked at more than 9%. But with inflation back down to about a 3% annual rate, and wages rising faster than that, that gap is narrowing, Hoyt said.
As of June, real incomes are 2.2% higher than a year earlier, the government reports. The drop in real incomes was sharpest early last year, when year-over-year comparisons were also skewed by the loss of 2021 stimulus money designed to offset Covid-related business shutdowns. In a report last summer, Goldman Sachs analysts projected discretionary household cash flow would bottom out in late 2022 and rise this year, slowly at first and then accelerating through the year. That appears to be what's happening, though Goldman says it hasn't updated that report to provide a 2024 forecast.
Second-quarter 2023 earnings in retail have shaken out consistent with those forecasts, too. Target's stock dropped after it reported, as boycotts related to its long-standing sales of Pride merchandise angered some customers, but Walmart and Amazon's retail business both beat forecasts, with Walmart's grocery business benefiting from high restaurant inflation. Walmart's stock is up 15% in the last year while Amazon's, which is driven more by the company's cloud computing services business, is up 55%. But even restaurant sales are recovering, Hoyt noted.
A government shutdown will hurt, but won't tank the economy
Congressional Republicans are talking tough about shutting the government down as soon as October, as they often do around budget time, and the typical reaction to what might happen if Washington suspends its operations are summed up by this 2017 headline from a Standard & Poor's report: "With a U.S. Government Shutdown, There Will Be Blood."
Any impact from a government shutdown is likely to be negative, but it's also likely to be small because shutdowns related to budget disputes are short, Hoyt said. The bill to raise the debt ceiling called for large automatic budget cuts that both political parties will likely want to avoid if a deal is not reached by Jan. 1, he said.
"If they did [stay deadlocked], that would be an invitation to a recession,'' he said. [But] $1.5 trillion in excess savings is still out there. It does provide a firewall, a cushion. If people lost their jobs, they could pull on it."
