Beware of This Consumer-Spending Chain Reaction

The top 20% of households still have excess cash saved up...

But frankly, that won't make a huge difference for the rest of us.

According to a recent study on household finances by the Federal Reserve, the lowest 80% of U.S. households by income have less cash than they did before the pandemic.

Said another way, today's economy is looking a lot like the late 1940s.

The comparison has been on our minds for quite some time. Last summer, we discussed how the early stages of the pandemic looked a lot like the end of World War II. In both cases, Americans built up an insane amount of cash.

But as U.S. soldiers returned home after the war, they spent that cash with a vengeance. Spending on durable goods more than doubled... and residential housing expenditures increased sixfold.

It was a similar story as the world reopened after COVID-19. Folks started traveling like never before. "Revenge spending" was so fast and furious that it helped set off a wave of inflation... and even after higher prices took their toll, spending hasn't slowed down much.

That is, until now. Households are finally running out of cash. As we'll explain today, consumers are in trouble. And that's going to cause problems for the rest of the economy soon...

The wealthiest Americans typically aren't characterized by 'excessive' consumption...

By that, we mean they already had plenty of cash and earnings before the pandemic. The extra savings from government stimulus didn't change their spending patterns.

But the other 80% are in trouble. These households now possess fewer liquid assets than they held at the onset of the pandemic.

The data suggests a decreasing financial buffer for U.S. consumers. Consumers have played a vital role in sustaining the economy this year... So that's not what you want to see if you're worried about a recession.

As household discretionary funds run out, it will cause an economic slowdown. Consumers will be forced to cut back on spending, which will hurt gross domestic product and economic growth.

And when consumers have less money to spend on goods and services, businesses will take a hit to revenue.

Said another way, we're staring down the barrel of a recessionary chain reaction.

Companies might slow down production due to decreased demand. This slowdown could lead to layoffs or reduced working hours for employees.

It could even lead to bankruptcies... and it's already starting. Through September, there have been 516 corporate bankruptcies this year.

That's about as many as we saw through the third quarter of 2020, in the middle of the pandemic. And it's more than the entirety of both 2021 and 2022.

Plus, if folks are laid off, their income will drop to zero... and their spending power will get even weaker.

This is yet another reason for banks to become more conservative in their lending practices. They don't want to lend when they think people or businesses can't pay them back.

And if more businesses go bankrupt, they'll tighten up on business lending, too.

U.S. households could be the first domino to fall...

But they won't be the last.

Now that we're out of the pandemic buffer, it won't take much to start the chain reaction that will send us into a recession.

We've been warning you for months that the recession could hit late this year or early next year. With households continuing to spend as much as they can, we're unlikely to get the bad news by December.

That's why we expect a recession to officially start sometime next year.

Don't get caught unawares. Despite stocks doing well this year – for the most part – the 2023 rebound won't last much longer. There are too many looming headwinds.

Regards,

Rob Spivey
October 16, 2023