Consumers Running Out of Covid Cash

Money managers and forecasters often see the economy in stark black and white contrasts. History has revealed that business conditions move from expansion to contraction and anything in between is background noise. The unique economic cycle today that we continue to note in our newsletters highlights the enormous monetary and fiscal stimulus that has delayed if not altered the typical economic playbook. How can home construction remain at record levels when homes are the least affordable in history? How can industrial production be testing record highs when Manufacturing (Purchasing Managers Index) has been contracting every month for over a year? With inflation and borrowing costs at multi-decade peaks, how can consumers keep spending at new record levels almost every month? The answer is artificial Government stimulus. Since Covid began less than 4 years ago the US has added over $10 trillion to the national debt for an increase of 44%. Manufacturing is contracting, but from unsustainable rates, so it is only moving back to normal levels of production. Housing unaffordability and 8% mortgage rates have frozen the large existing home market, but new home building and construction employment remain red hot due to the massive shortage of homes for sale. When it comes to consumer spending, there are signs of cooling in the lower 80% of income earners whose liquidity is below pre-Covid levels and accounts for over 60% of US consumption. The top 20% of earners who own 70% of our nation’s wealth and consume 40% of our goods and services remain strong and are keeping the economy away from any unemployment spike. The rich will continue locking in high yields to buffer the economy but falling liquidity among the bottom 80% should manifest in slower economic activity over the next few quarters. Forecasters have never been more incorrect in their forecasting of bad tidings over the past 18 months, but directionally we should finally see the labor market move from extreme tightness to mild slack in 2024. 

Shrinking consumer liquidity, 20-month lows in checking accounts combined with inflated prices and borrowing costs should slow economic activity and stall employment growth into mid 2024. This does not mean we will have a labor recession with high single digit unemployment, but rates should begin to normalize in 2024 in the 4 to 5% range. Unfortunately, some consumer pain is required to attenuate the Fed’s core inflation rate below 3% in 2024. The good news is that bond yields will begin to fall in sync with reduced consumption data and set up next year’s rally in beleaguered banks and small capitalization stocks.







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