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The US consumer is a key driver of the global economy.
US spending has been a key component in the economic recovery.
Whilst interpreting anything about the economy in the current environment is a tricky business, there are certain things catching the eye now with regard to consumption.
As always, these might raise more questions than answers but let's dive in and see what we can figure out. Starting with...
The idea of excess savings is a strange one. Just like many economic terms, it sounds all kinds of wrong. The word 'excess' implies 'too much' of something when what economists really mean is 'higher than it would have been ceteris paribus' (all else being equal).
And so we come to this excellent chart from Matthew Klein:
$2.4 trillion of excess savings accumulated since January 2020. And that's after the 'consumption-trend gap' has essentially been filled...
Consumption approximately back to trend, and $2.4 trillion on hand...
Which begs the question... What comes next? Or as Matthew puts it...
What’s going to happen to all that money?
Will the “excess” cash get spent in an orgy of “revenge consumption” as people make up for lost time?
If so, how much of the extra spending will go towards additional goods and services as opposed to higher prices?
Maybe the “excess” will instead get squeezed out of precarious consumers as emergency income supports and other forms of government aid are withdrawn to facilitate budgetary tightening.
Perhaps the entire idea of a latent cash hoard is an illusion because some Americans plowed more money into housing and their brokerage accounts while others paid down their credit card balances.
After all, the official definition of “saving” is basically just income minus spending on consumer goods, services, and interest payments, which leaves a lot of room for other uses.
Or maybe the pandemic-era savings boom will leave a permanent mark on household balance sheets, with most of the extra cash sitting relatively inert in untouched deposits that indirectly finance the government debt issued in response to the pandemic in the first place.
The idea of "revenge consumption" is attractive as far as travel and leisure go, but goods spending is a whole different bag.
People changed the way they spent during the pandemic and stocked up on goods: new washing machines, electronics, furniture... you name it, we bought it. All stuff that should last a few years...
Services spending is another matter and where the great hope lies...
What if people decide not to spend those excess savings, and keep them invested or sitting in a rainy-day fund?
Well that's fine! Consumers can take on debt and spend again just like they've always done before!
What's that? They already HAVE? 😮
U.S. consumer borrowing surged in November by the most on record, reflecting outsize increases in credit-card balances and non-revolving loans.
Total credit jumped $40 billion from the prior month after a revised $16 billion gain in October, Federal Reserve figures showed Friday.
On an annualized basis, borrowing increased 11%.
The November gain exceeded all estimates in a Bloomberg survey which had a median projection of $20 billion.
Revolving credit outstanding, which includes credit cards, climbed $19.8 billion -- the largest increase on record.
Non-revolving credit, which includes auto and school loans, rose $20.2 billion, the largest gain in six months.
That's some solid spending. Much of it may be attributed to an early Pre-Christmas rush, especially given the well-publicised supply chain issues around the time.
However, it does paint an increasingly troubling picture for aggregate demand.
- Fiscal Stimulus is over & Build Back Better is dead in the water for now
- Consumers have rapidly 'maxed out' credit
Clarification: Not maxed out just yet, but well on the way
Economic growth is reliant on some of these excess savings finding their way into people's pockets...
Are we going to see growth fears overtake inflation fears?
Take this quote from J.P. Morgan Global Research analysts Kolanovic & Malik 👇
"Our view is that 2022 will be the year of a full global recovery, an end of the global pandemic and a return to normal conditions we had prior to the COVID-19 outbreak.
We believe this will produce a strong cyclical recovery, a return of global mobility and strong growth in consumer and corporate spending, within the backdrop of still-easy monetary policy.
For this reason, we remain positive on equities, commodities and emerging markets and negative on bonds."
The 'normal' conditions prior to Covid-19 weren't that great...
Remember the inverted yield curve and recession warnings in mid to late 2019? 👇
That's NOT to say that this is the end and recession is imminent.
Consumer credit data is notoriously noisy, savings can be used to pay down debt and increase spending, and the baseline capacity for borrowing is likely higher now (due to higher asset prices and higher wages) as discussed in June last year. 👇
Still, the path ahead is not as clear as it once was.
Throw in a Federal Reserve that's intent on hiking (likely starting as soon as March) and the next few months are set to be VERY interesting.
We talked about this (and a few other things) earlier today 👇
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