opinion | Can anything save the US economy from recession?
It is easy to explain what could hurt the economy in the not too distant future. To fight inflation, the Fed raises interest rates, and when the Fed starts to put the brakes on, a recession often follows. The Russian war in Ukraine, ongoing supply chain disruptions, the COVID-19 bombings, and the termination of $5 trillion in federal aid to fight epidemics are adding pressure to an already tense situation.
What’s less clear is how to rescue the country from recession when the US appears to be returning to a have/have-no economy.
The most direct way to avoid a recession is for Americans to keep spending. Voters may not like today’s economy and rising prices, but they boosted their spending every month this year. Luxury brands and stores like Nordstrom that cater to discerning shoppers are doing particularly well. So is anything travel-related: flights, hotels, and destinations like Disney theme parks are thriving in what has been dubbed the summer of “revenge travel.” Some cruise lines even report standard bookings.
“If the consumer doesn’t back off, you don’t get a recession,” says Joe Brusolas, chief economist at RSM Tax and Consulting. “The real economy continues to do very well.”
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There is a lot of money in people’s hands, which helps in maintaining spending. It’s extraordinarily easy to get a job – and a pay raise. Many Americans were also able to save more over the past two years because they didn’t get out much and many received pandemic stimulus payments and other aid. Oxford Economics estimates that households have saved an additional $2.5 trillion since the pandemic began Only $40 billion has been spent so far. It’s an extra cushion against price hikes. Corporations, state and local governments also have a lot of extra money that they can spend or return to shareholders and residents.
But while public spending is still going strong, not everyone has the money to spend it. Walmart shoppers cut back on everything but food and other essentials. It’s a similar story with savings. Even after the stock market plunged, the top 40 percent still had a lot of extra cash. Meanwhile, the savings that the lowest 20 percent have accumulated over the past two years are Already gone, Morgan Stanley has been found.
Hourly workers usually enter survival mode during periods of high inflation. They are struggling to keep up with the rising costs of gas, food and rent, and there is little extra spending they can cut back. As the economy slows, they will likely see their bargaining power waning and their working hours shrinking in some industries.
Consumers shift their spending from goods to services
Right now, the wealthy continue to make large purchases, which is enough to keep the overall economy afloat. But that spending could evaporate quickly, too. Look at the real estate market. Almost overnight, the frenzied bidding wars came to a halt and home sales dried up this spring as consumers finally held off on price hikes and higher mortgage rates.
There is no doubt that the US economy is undergoing a major transformation—in fact, multiple transformations. There is a triple rollback of government support: the Federal Reserve raises interest rates and halts its bond-buying program, and public federal spending is declining.
At the same time that this help is disappearing, Americans are changing their habits. After two years of staying home and spending a lot on goods, they are once again venturing out and spending on services. We’re transitioning from the Netflix economy to the Night Out economy, and retailers like Target admit they’ve been shocked by how quickly spending patterns are shifting.
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Transition periods are always difficult, and this period is especially difficult to read. How long will consumers keep spending? Do families simply shift their spending from home renovation and backyard fun to eating out and traveling? Or might consumers close their wallets soon? If the stock market and house prices fell this summer, how much would that dissuade consumers from continuing to spend their cash on hand?
As recession warnings pile up, it’s important to keep in mind what matters to the real economy: employment and consumer spending. It is a good – and even preferable – Fed rate of appointment and consumer spending that the rating be lowered from strong to solid.
As long as the rich and middle class keeps spending, there is likely to be no recession. But this does not mean that the economy will feel good for many, If not most Americans.