The economy's safety net is about to disappear thanks to an oncoming perfect storm
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- Consumer spending held up the US economy even as many worried about the prospect of a recession.
- A recent investor survey found most respondents predicted personal consumption would shrink.
- There are signs the blissful summer of Barbie and Taylor Swift is about to end.
A perfect storm is coming for the US economy.
Even as interest rates skyrocketed over the past 18 months, strong consumer spending kept the US economy moving. It's what helped fuel a summer of Barbie, Beyoncé, and Taylor Swift.
But the delayed impact of those higher interest rates, together with student-loan payments restarting and pandemic-era savings running dry, is set to put fresh pressure on consumers.
A recent Bloomberg Markets Live Pulse survey found that 21% of more than 500 investors predicted that personal consumption would shrink in the fourth quarter. A further 56% said consumption would reverse in early 2024.
The economy's safety net could now be at risk.
Higher rates start to bite
Let's start with interest rates. The Federal Reserve first started hiking rates in March 2022 in an effort to get inflation under control.
The impact of those hikes has been muted, in part because many borrowers, like existing homeowners, have low rates locked in.
Credit-card debt, in contrast, tends to move up and down with interest rates. And Americans have been accruing a lot of credit-card debt.
According to the Federal Reserve Bank of New York, Americans had over $1 trillion in credit-card debt in the second quarter of this year, a record high.
The economist David Rosenberg says it typically takes six months for a recession to hit the economy after interest rates increase by this much.
"So, I think that by the third or fourth quarter, we're going to start to see more evidence, but it's going to come out of the consumer side, not the corporate side," Rosenberg said in a CNBC interview.
Then there's the return of student-debt payments. These repayments were paused at the beginning of the coronavirus pandemic, and their return could create financial stress for borrowers.
In a Morgan Stanley survey, 37% of respondents said they'd need to cut their spending in other areas to make their payments, while 34% said they wouldn't be able to make the payments at all.
Lastly, you have Americans' rainy-day funds.
US personal savings have plummeted after surging during the pandemic. That COVID cash stockpile helped support the economy despite rising interest rates and historically high inflation.
According to data from the San Francisco Fed, these excess savings could run out this quarter.
'Save your pennies'
Of course, there are some positive signs, including a strong job market and decreased inflation concerns. This has some predicting an expansion for the economy. Even Treasury Secretary Janet Yellen sounds more optimistic.
"I see a soft landing as being a possible outcome, and the one that I hope we will be able to achieve," Yellen said in February, adding: "The economy is fundamentally in good shape, and inflation is coming down if you measure it on a 12-month basis."
She did note that there was still work to be done, and elsewhere there's a growing chorus of those sounding the alarm. The retailer Macy's recently said its shoppers were under financial pressure, with credit-card balances on the rise and the return of student-debt payments on the horizon.
Walmart, meanwhile, has benefited from spending on essentials.
"Customers are stretching their dollars further and seeking better value across more categories, more often," the CFO of Walmart, John David Rainey, said in a call with analysts last week.
JPMorgan's boss, Jamie Dimon, recently highlighted the risks to the economy.
"I just think people make a mistake to look at real-time numbers and not look at the future. And the future has quantitative tightening," Dimon said at a conference, referring to policies that take money out of the economy.
"We've been spending money like drunken sailors around the world," he continued. "This war in Ukraine is still going on. Those are really big buts. To say the consumer is strong today meaning you got to have a booming environment for years is a huge mistake."
Piper Sandler's chief global economist, Nancy Lazar, recently warned that the economy was "overheating" and was about to get more "painful."
"Save your pennies because, unfortunately, the economic outlook is going to get worse before it gets better," Lazar told Fox News Digital, adding that it was "a time to hunker down and to try to maintain your savings rather get further into debt."
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