Americans Spending? (Recession Warning)
Is a new recession warning flashing?
Let’s discuss.
You've probably heard us say that consumers (like us) are the backbone of the U.S. economy.
It's true.
Consumer spending accounts for nearly 70% of economic growth.
It's been the engine of the pandemic recovery and has played a large part in calming recession fears.
As long as Americans still spend on things like cars, houses, birthdays, and trips abroad, they create a significant tailwind against recession risks.
You can probably hear the "but" coming.
Here it is:
The latest data shows that consumer spending may be slowing as Americans become less willing to open their wallets.1
While Americans went big on "revenge spending" on vacations, concerts, and the in-person experiences we missed out on during the pandemic years, the party may be winding down.
There are a few seasonal reasons that could explain the slowdown.
Students just returned to school and summer vacations have mostly wrapped up.
Student loan repayments begin next month for millions of Americans.2
However, analysts think some bigger trends could be at work, potentially foretelling a spending deceleration in the critical final months of the year.
Here's one:
Americans are drawing down their post-pandemic savings at a rapid rate.
While Americans overall still have billions in savings, it's an economic trend we're watching.
At the same time, it's getting harder to access credit.
According to a summer survey, rejection rates for credit applications (including credit cards, auto loans, and mortgages) have increased sharply in the last few months, especially for people with lower credit ratings.3
Since these folks likely have the least savings, it's a potential distress signal for financially fragile consumers.
However, there's a bright spot that could help prop up American spending.
Income growth is finally outpacing inflation.
That means Americans have more money in their wallets after inflation. That's good news for spending.
How could consumer spending trends affect markets?
Markets seem to be in mostly neutral territory, without any strong moves toward optimism or pessimism.
If concern about recession headwinds flares, it could cause a pullback. Conversely, if optimism about economic tailwinds bubbles up, we could see further strength in the bull run.
Either way, we’ll be watching and keeping you updated.
Until next week,
Your Eagle Wealth Team
P.S. Student loan forgiveness scams are surging, unfortunately. Please be sure to verify all information through official sites like studentaid.gov and be on alert for false urgency and too-good-to-be-true promises.
Consider ‘Bunching’ Your Giving
When it comes to giving to your favorite causes and organizations, in many ways, how you give can be just as important as what you give.
Take “bunching,” for instance. In this giving strategy, you make larger donations in certain years rather than giving smaller amounts every year in order to surpass the standard deduction threshold.
Bunching allows you to itemize deductions in specific years, maximizing the tax benefits of your charitable giving, allowing you to make the most of your charitable contributions and reduce your overall tax liability over time.
Here’s an example of how this could look.
You can read more about bunching here. As always, please give us a call if you’d like to learn more.
Source : https://www.schwabcharitable.org/bunching-charitable-contributions
(Please consult with a tax professional for guidance tailored to your specific financial situation & the latest tax laws.)
The Week on Wall Street
Stocks ended the week roughly where they began as investors digested a mixed set of new economic data.
The Dow Jones Industrial Average gained 0.12%, while the Standard & Poor’s 500 slipped 0.16%. The Nasdaq Composite index fell 0.39% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, added 1.23%.4,5,6
Stocks Struggle For Direction
Stocks traded around the flatline without any catalyst in either direction. On Thursday, investors welcomed the European Central Bank, signaling its rate-hiking campaign may be nearing its conclusion and a successful IPO that revived optimism in the capital markets. Investors also cheered a stronger-than-forecast retail sales report and a modest increase in core producer prices, overlooking a higher-than-expected headline number.
But sentiment quickly reversed on Friday as a drop in consumer confidence, troubling news in the semiconductor space, and a labor strike at the nation’s major automakers dented Thursday’s optimism, sending major averages to a mixed close for the week.
Inflation Progress Stalls
Surging gasoline prices drove August’s inflation rate to its highest monthly rate this year, rising 0.6%, while the year-over-year Consumer Price Index posted a 3.7% increase, up from July’s 3.2% annual rate. Core inflation (excludes energy and food) was more encouraging, rising 4.3%-- down from July’s reading of 4.7%.7
Producer prices also came in higher than expected, rising 0.7% in August, above the estimate of a 0.4% increase and the biggest monthly gain since June 2022. The year-over-year increase was a more modest 1.6%. Gasoline prices significantly contributed to the month’s jump; excluding food and energy, prices aligned with forecasts, ticking up 0.2% in August.8
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1. https://www.cnn.com/2023/09/07/economy/revenge-travel-decline-spending-splurge/index.html
2. https://www.cnn.com/2023/08/31/politics/student-loan-payments-resume/index.html
3. https://www.newyorkfed.org/microeconomics/sce/credit-access
Chart Sources:
Chart 1: https://fred.stlouisfed.org/series/PSAVE#0 and https://home.treasury.gov/policy-issues/coronavirus/assistance-for-american-families-and-workers/economic-impact-payments
Chart 2: https://www.fidelity.com/learning-center/trading-investing/are-we-in-a-recession, https://fred.stlouisfed.org/series/CES0500000003#0 and https://fred.stlouisfed.org/series/CPIAUCSL. Inflation-adjusted income calculated as Hourly Earnings/CPI for all periods.
4. The Wall Street Journal, September 15, 2023.
5. The Wall Street Journal, September 15, 2023.
6. The Wall Street Journal, September 15, 2023.
7. The Wall Street Journal, September 13, 2023.
8. CNBC, September 14, 2023.
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