Title: The Resilient American Consumer Defies Wall Street’s Recession Predictions – Why Betting Against Them is Risky
The American consumer has consistently proven their resilience over the past year, defying the recession predictions made by Wall Street. This remarkable trend has given rise to an essential question – why would anyone want to bet against the American consumer? According to a recent note from Ned Davis Research, doing so is an extremely risky move.
Those who have maintained a bearish stance on the economy have cited various reasons to support their predictions of an imminent slowdown. However, when examined from a broader perspective, these concerns may not be as detrimental to economic growth as they initially appear.
For instance, although delinquency rates for consumer loans have increased, they still remain well below historical averages. The delinquency rate for consumer credit card loans is currently at 2.58%, which is only one percentage point higher than its low in 2021 and 31% below the 32-year average of 3.74%.
Additionally, the impact of rising interest rates is limited to new loans or refinancings. Surprisingly, over 75% of mortgage holders currently enjoy an interest rate below 5%. This situation is mirrored in the corporate debt market, where 76% of debt held by S&P 500 companies is both long-term and fixed at low interest rates, as highlighted by Bank of America’s Savita Subramanian earlier this year.
Arguably, the most discussed risk related to consumers in recent months has been the notion that they have depleted all their excess savings accumulated during the pandemic. However, Ned Davis Research describes this concern as a red herring. Consumers still retain substantial savings, with approximately $6 trillion sitting in money market funds alone.
When evaluating last week’s revisions to consumer spending data, it becomes evident that there has been a significant downward revision in past years. As a result, the estimate for cumulative excess savings until August 2023 was more than doubled. Furthermore, it’s important to note that saving is calculated by deducting outlays from disposable personal income. Notably, some of these savings are invested in financial and tangible assets.
By considering an alternative measure of excess savings that accounts for consumers redirecting savings towards purchasing financial assets like stocks and bonds, the saving rate in the second quarter was revealed to be close to 10%. This figure is more than double the commonly-cited NIPA personal savings rate.
Crucially, consumers across all income levels remain largely employed, and the higher interest rates currently available have led to higher interest income on their accumulated savings. This aspect holds particular significance in today’s landscape as the baby boomer generation represents a larger share than ever before. While higher rates do increase borrowing costs, they also provide support for individuals with savings, allowing them to continue spending.
In fact, individuals who refinanced their mortgages at around 3% and are investing in money market funds yielding 5% or more are experiencing positive carry and essentially acting like a bank. Amidst the arguments against the American consumer, it seems that some have overlooked this significant factor. These circumstances may also contribute to the explanation of why monetary policy has had less impact in this economic cycle. Thus, betting against the American consumer appears to be an extremely risky proposition, according to Ned Davis Research’s conclusions.
The enduring resilience of the American consumer has not only defied Wall Street’s recession predictions but has continued to propel economic growth. Despite some concerns that have been raised, it is evident that consumers still possess substantial savings and have maintained employment across income levels. The favorable interest rates they now enjoy also support their ongoing spending. Accordingly, it is clear that underestimating the strength of the American consumer is a perilous bet that few should be willing to make.
