It may be the most anticipated recession in history. Economists have been forecasting contraction for the US economy since at least April, shortly after the Federal Reserve began raising interest rates. But a bit like Godot, it has yet to show up. Credit the cash cushion American consumers and corporations built during the pandemic. But that will eventually disappear, and then the economy will nosedive.
In 2020 and 2021, generous unemployment insurance benefits, stimulus cheques and child tax credit payments helped households squirrel away roughly $2.3tn in excess savings — the amount above what they would have saved had there been no pandemic. This powered a surge in demand as the economy reopened (fuelling upward pressure on inflation). October retail sales posted their strongest gain in eight months. Consumption accounts for more than two-thirds of US gross domestic product growth, and so far spending has remained strong.
But with consumer price inflation running at 7.7 per cent in October and median wages rising 6 per cent, according to the Atlanta Fed’s wage growth tracker, people’s standards of living are falling. As stimulus programmes ended last year and the economy reopened — increasing opportunities to spend money — Americans’ cash war chest has been dwindling, and the spending extravaganza cannot last. Economists’ estimates for how much is left vary from about $1.2tn to $1.8tn.
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"In the months ahead, the cash war chest will dwindle, earnings will suffer and unemployment will rise. Godot never came, but a recession will, sooner or later. Whether a soft or hard landing, there will be a much thinner cash cushion to buffer it." https://t.co/YVP35bjVL6
— Nomi Prins (@nomiprins) December 1, 2022