- Rates are much higher than the rates of the pandemic-era stimulus. It will make the 2023 recession worse.
- High inflation, slowing wage growth and shrinking savings are all causing pressure on households.
- In a downturn in 2023, Americans won’t get more assistance. The pain will only worsen as their financial reserves diminish.
The US economy’s postpandemic party has ended. Prepare for a very unpleasant comedown.
Roughly $5 trillion in government stimulus, historically low interest rates, and a salvo of emergency lending programs helped the US economy rocket out of its slump and stage One of the fastest recovery periods in modern history.
But this quick recovery came at a cost. Inflation began to heat-up in the spring 2021. At first, it was driven by used car prices. But, soon, it spread to gas, food and housing.
The monetary policy cops arrived at the party shortly after. But it was too late. The Federal Reserve started raising interest rates this March, making all forms of borrowing more expensive and hitting the brakes on economic growth. In a matter of weeks, mortgages, car loans, credit card debt, and other forms of borrowing became more expensive. Yet inflation charged even higher in the following months, and data published last week showed one key inflation gauge September saw a new four-decade high.
The economy has not performed as expected this year. However, the outlook for next year’s performance is even more concerning. Experts expect 2023 to have higher interest rates and an even higher level of inflation. They also predict rising unemployment and a tighter labor market.
The removal of huge stimulus and the shift to slower growth will be a “painful process akin to waking up the next morning with a hangover after a long, hard bender,” Lauren Sanfilippo, director of Bank of America’s Chief Investment Office, said.
The last bastions of the post-lockdown recovery are already in decline, and Americans seem less prepared as the week progresses.
Americans are spending their cash savings for the pandemic-era in excess
The first is that households are not as rich as they were a year ago. Through the initial stages of the pandemic, Americans had a $2.1 trillion savings account. This was as a result of the plunge in spending and the stimulus that hit households. But they’ve spent $630 billion — roughly one-third — of that buffer already, according to the Bureau of Economic Analysis.
The total savings are well above levels pre-crisis, but the cushion is still high. Is rapidly fading. The decline rate has increased in recent months. As inflation continues to bite household finances, Americans will be faced with the hard choice of cutting back on essentials or tapping into savings that they had before the pandemic.
They also have a lower day-to-day cash flow. Real disposable personal income per capita — what the average American can spend after taxes and inflation — held flat at $45,300 in August, according to government data. It is still below the March low of $46,000, but it is in line the trend that has been observed since March.
Simply put, the average household has reached its financial peak. Americans are You can save lessThey are spending more to make ends meet and less to save. When that buffer is exhausted, weaker savings can make it more likely that there will be a recession. Revenues will decline, companies will reduce costs by firing workers, and overall spending will plummet.
The once-great job market is likely to end soon
The recovery was also helped by the unusually tight labor market. But that trend has now reversed. American companies are Reduce their hiring plansIn the face of rising interest rates and fears about a possible recession, there are still some jobs available. Although September’s job gains were historically high, they continued to show a longer trend towards slower growth. Job openings, meanwhile, fell in August by the most since the first months of the pandemic.
As employers reduce their demand for labor, so does the worker’s pay. Monthly wage growth They have slowed down from the fast pace of earlier in the yearThey now equal the pre-crisis median. After inflation is taken into account, the Weekly salary for the median workerThis is lower than what they brought home prior to the lockdowns in early 2020.
Economic pain will increase due to the Fed’s clampdown on inflation
As the Fed intensifies its fight against inflation, the historically low interest rates that helped households through the crisis are no longer available. The Fed’s benchmark rate The current range is between 3.3% and 3.25%These rates are well above the rate at which they can restrict, not boost, economic development. This has helped to push mortgage rates up to high levels This was not the case since the housing bubble burst in mid-2000sThe average credit card rate has risen by two percentage points since March,
While the central bank views rate hikes as a tool to reduce inflation, Americans will still be trapped between rising costs and more expensive borrowing until then.
Therefore, it is not surprising that economists almost predict that a recession will occur in the next 12 month. This forecast is from BloombergAccording to economists, the chance of a downturn before October 2023 is 100%. Survey of economists by The Wall Street JournalThese odds increased from 49% to 63% in July to 63% by October
Fed officials haven’t predicted a recession in advance, but The latest projectionsThe next year will see a significant slowdown in growth, but a rise in unemployment to 4.4%.
In the next recession, Congress won’t likely come to our rescue.
Americans Expect little in the way of assistanceThe next recession will be here before you know it. The inflation rate is still at 8.2%, which makes lawmakers extremely wary about putting more money into the economy. Republicans will likely take control of Congress after the November midterm election, further reducing the chance of a bipartisan stimulus package if a downturn occurs.
The aforementioned trends, taken together, make for a grim outlook. Although the Fed promises to continue raising rates until “the work is done”, it also guarantees that borrowing costs will rise and the economy will slow down further. Inflation must be controlled if we are to see a healthy economic expansion. The next recession will only get worse if the previous downturn continues.
