As American consumers squander their savings, there are now signs of a slowdown, and there are some warning signs that the US economy may soon fall into a consumption recession. As is well known, American consumers have always been the "strongest pillar" of the economy.
Macquarie Global strategist Thierry Wizman predicts that at some point between now and the end of the first quarter of 2024, the US economy will experience a consumer led slowdown. He stated that a significant decline in consumer spending may force GDP growth to slow down and push the overall economy to the brink of recession.
His pessimistic prediction contradicts the statements of other commentators, as consumers have maintained a consumption boom for the third consecutive quarter of this year. Retail sales increased by 0.7% in September, more than twice what economists had expected.
But Wizman pointed out that flexible spending itself is the problem: spending has always been so strong, and as savings dry up and the US financial situation changes, it will inevitably sway in the other direction.
He said that the US economy is currently showing some warning signs that American consumers are losing momentum.
Here are five weak signals indicating that a consumer recession is imminent.
1. Credit card delinquency rate is on the rise
Last quarter, the default rate of credit card holders increased to 2%, approximately twice the record for the first quarter of 2021. Meanwhile, the latest Household Debt and Credit Report from the New York Federal Reserve shows that the proportion of Americans who are severely delinquent on credit card payments for at least 90 days rose to nearly 6% in the previous quarter.
The report also states that the credit card default rate of those who already have car and student loan debts has significantly increased. Wizman said this is a sign that financial pressure is increasing, which may lead to people cutting back on spending.
2. Reduction in American Savings
The personal savings rate further decreased last month. According to data from the Bureau of Economic Analysis, Americans spent an average of 3.4% of their disposable income on savings in September, down from 4% in August. This is much lower than the savings rate before the pandemic, when Americans saved around 7% of their disposable personal income.
Compared to historical standards, this is actually very, very low, "Wizman said of the current savings rate." Therefore, adjustments must be made at some point
In addition, consumers have also withdrawn most of their savings from the pandemic. A study by the San Francisco Federal Reserve suggests that excess savings may have been depleted by the end of last quarter.
3. Consumer confidence has been declining for three consecutive months
According to data from the Conference Board, the consumer confidence index fell to 102.6 in October, down from 104.3 last month. Considering factors such as inflation, stock prices, and interest rates, this marks the third consecutive month of deterioration in consumer attitudes.
At the same time, the World Federation of Large Enterprises' expected index, which reflects consumers' short-term economic prospects, fell to 75.6 in October. The index is still slightly below the critical threshold of 80, which usually indicates a recession in the next 12 months.
The World Federation of Large Enterprises stated in a statement: "Consumer concerns about the upcoming economic recession are still intensifying, which is consistent with our expectation of a brief and slight contraction in the economy in the first half of 2024
4. Consumers do not plan to splurge during this holiday season
Americans seem unlikely to splurge, even as they are about to enter the holiday season. A survey conducted by McKinsey of 1000 American consumers found that only 35% said they plan to spend a lot this year, down from 39% of those who expressed willingness to splurge before the 2022 holiday.
Another survey by Morgan Stanley found that 69% of people wait until retailers offer discounts before starting shopping. Strategists say that consumers expect an average discount of around 30%.
5. Retailers do not recruit so many employees before holidays
According to data from the Bureau of Labor Statistics in the United States, holiday recruitment by retailers has dropped to 135000, the lowest level in about five years.
Recruitment during the holiday season is usually completed in October, and combined with the new job creation in the retail industry defined by the Bureau of Labor Statistics in the latest employment report, retailers expect a weak holiday season, "said Torsten Slok, Chief Economist at Apollo Global Management.