This article is provided by ITR Economics in partnership with IMEC.
Headlines today are full of recession fears, with mentions of falling stock prices, high inflation, and rising interest rates. To better understand whether we are actually headed toward a severe recession, let’s take a closer look at the underlying fundamentals in the economy.
American businesses remain in a strong position. US Domestic Corporate Cash Holdings, at $1.257 trillion, are down 8.6% from the 3Q21 record high but still about 50% higher than the pre-pandemic (4Q19) record high. Similarly, US Corporate Profits (with capital consumption adjustments) have ticked down from a record high but are still elevated. The US Business Confidence Index is declining, but it is still above the long-term average. Business Confidence is not signaling recession at this juncture.
Businesses have the means to invest to expand capacity and address the labor shortage and margin squeeze. Capex is likely to continue to rise.
Some consumer-focused indicators paint a less rosy picture. Consumers are contending with elevated inflation (9.1% in June). For many, this is highest of their adult lives and, for the older generations, something not experienced for four decades. Consumers aren’t receiving the financial boost that they did in 2020 and 2021 via federal transfer payments (including government stimulus checks, tax credits, etc.) As a result of a confluence of factors, the Savings Rate has fallen to 5.4%, well below the 10-year average of 8.6%. Of primary concern is how this impacts consumer activity ̶ inflation-adjusted figures for US Total Retail Sales have stumbled, ticking down in recent months.
These factors may cause worry among business owners, as consumers drive roughly two thirds of the US economy. However, our analysis suggests that despite these headwinds, consumers remain relatively strong. When excluding transfer receipts, personal income – both in nominal dollars and inflation-adjusted – is still rising. With two job openings for every unemployed person, the labor market is extremely tight. With labor likely to remain scarce, wages will rise further. Later this year, we expect pricing pressures will ease, bolstering consumer purchasing power.
What about the burden of debt in the face of interest rate rise? While credit card delinquencies have risen mildly to 1.7%, they remain below the pre-pandemic five-year average of 2.4% and well below the 6.6% peak of 2009. Delinquency rates for other consumer loans and mortgages tell the same story. In fact, overall Household Debt Service Payments as a Percent of Disposable Personal Income are at 9.5%, lower than the pre-pandemic trend and significantly lower than the record 13.2% in December 2007. The consumer is not in the financial predicament they were in leading up to the Great Recession.
While we hope that these datapoints will give you some peace of mind as you plan for your business, beware of complacency. We expect the US economy will be relatively stagnant over the coming quarters; do not expect a continuation of the robust growth of 2021. Also keep in mind that some individual markets will contract. Markets that experienced a surge from COVID-19 are more likely to normalize back toward their prior trajectory. Ensure you are planning for a more price-conscious consumer, higher borrowing costs, and waning business cycle momentum. Use this time to improve efficiencies, research new products or markets, or schedule downtime for capital investment installation or upgrades.