Ho-Hum Savings and Happy Holidays

Episode Summary

Executive Summary: The episode centers on whether the U.S. consumer can keep the economy out of recession. The hosts conclude the next 9-12 months look manageable, supported by easing inflation, still-positive real disposable income, low debt burdens, and pent-up demand in autos and services. The main risk is late 2023 into 2024 as excess savings fade, borrowing costs rise, and labor income growth slows.

Main Topics: Consumer health and recession risk (Priority: 5/5): The discussion frames the American consumer as the key determinant of whether the U.S. enters recession, with most agreement that the near term is resilient but the outlook worsens later in 2023 and into 2024. Excess savings and saving-rate normalization (Priority: 5/5): The panel debates whether households will keep spending down accumulated pandemic-era savings or begin rebuilding balances as wealth falls and uncertainty rises. Inflation, real income, and purchasing power (Priority: 5/5): A major theme is the sharp slowdown in inflation and its effect on real disposable income, which has recently turned positive again after being heavily squeezed in 2022. Debt service, borrowing, and household leverage (Priority: 4/5): The speakers assess consumer debt burdens as low today but rising ahead because of higher rates, more credit card borrowing, and shorter-term consumer debt repricing faster than mortgage debt. Pent-up demand in vehicles and services (Priority: 4/5): Mark Sandy argues that auto demand and post-pandemic service spending will help sustain consumption, though others note that some demand may already have been satisfied or shifted. Consumer sentiment as a signal (Priority: 3/5): The group compares the Conference Board and University of Michigan sentiment surveys and discusses their mixed usefulness as recession indicators.

Key Arguments: Scott Hoyt argues the consumer looks fine over the next 9-12 months, but risks rise in late 2023/early 2024 as excess savings get used up and saving rates normalize. Excess savings built during the pandemic gave households a buffer; drawdown occurred as inflation eroded purchasing power and consumers used cash to maintain spending. Chris Dorides argues wealth effects matter: lower stock and housing values, especially for higher-income households, will encourage more caution and add to saving. Marissa Di Natale argues low-income households are more exposed to inflation and borrowing costs, but higher-income households still control most spending power. Mark Sandy contends improving inflation and rising real disposable income should allow spending to continue without a recession unless an external shock hits. The panel agrees household balance sheets are not stressed like in 2005-2007 because debt service burdens remain low and most mortgage debt is fixed-rate. Mark Sandy sees pent-up demand in vehicles and services as a tailwind, while Scott Hoyt says some goods demand was already 'spent up' during the pandemic and auto demand may be less robust than assumed. The group treats consumer confidence as a secondary indicator: the Conference Board survey aligns more with labor-market conditions, while Michigan reflects financial conditions and market wealth.

Data Points: Excess savings peak: $2.6-$2.7 trillion - Estimated excess savings accumulated by households during the pandemic at peak. Excess savings level: $1.7-$1.8 trillion - Approximate amount remaining by September 2022, after significant drawdown. Consumer saving rate: 2.3%-2.4% - Recent saving rate level discussed as near record lows before normalizing. Equilibrium saving rate assumption: ~7% - Scott Hoyt says his model’s equilibrium saving rate is over 7%. Real disposable income, 3-month annualized: 2.5% - Latest reading cited as showing renewed positive purchasing power growth. Real disposable income, year-over-year: -2.5% - Referenced as still weak due to the prior inflation shock and policy cliff effects. Core PCE inflation, 3-month annualized: 3.6% - Used to show inflation is moderating materially from earlier peaks. Core PCE inflation, year-over-year: 4.7% - Still above the Fed’s target but slowing from prior highs. PCE inflation, month-to-month: 0.1% - BEA report showed a sharp deceleration from the prior month. PCE inflation prior month: 0.4% - Compared with the latest 0.1% reading, highlighting disinflation. Real consumer spending, 3-month annualized: 3.0% - Suggests consumers are still spending at a healthy pace. Real consumer spending, year-over-year: 2.0% - Used to support the argument that spending remains resilient. Financial obligations ratio: 14.49% - Q3 reading, described as the highest since early 2020 but still low historically. Forecast financial obligations ratio: ~16% - Projected by the hosts for the next year as rates and rents rise. Debt tied to market rates: ~20% - Estimated share of household liabilities that adjusts with market rates over a year. Mortgage debt outstanding: ~$12 trillion - Illustrated how much of household debt is in fixed-rate mortgages. Consumer debt and unsecured loans outstanding: ~$1-$1.2 trillion - Used to show consumer debt is smaller than mortgage debt but important for payments. Gas price rule of thumb: $3 per gallon - Chris uses this as an outdated heuristic for recession risk. Copper price: $3.78 per pound - Chris argues the level is less useful than the downward trend, with prices down about 15% year over year. Conference Board consumer confidence: ~108 - Mentioned as recently improved and roughly flat over the last six months. University of Michigan sentiment: Record low / 80 for Democrats and 40 for Republicans - Used to show a sharp divergence and heavy political polarization in sentiment. Top-third income share of spending: ~two-thirds - Rule of thumb cited by Mark Sandy for where most consumer spending comes from. Auto market trend level pre-pandemic: ~17 million units - Mark’s estimate of underlying vehicle sales before pandemic effects. Current auto sales pace: ~14 million units - Used to argue there is still some pent-up vehicle demand.

Pivotal Quotes: "I am not worried about the next nine to 12 months." — Scott Hoyt: His baseline assessment of consumer resilience in the near term. "The American consumer hangs tough and continues to just do their part... we can talk about what that means. Feels like we're going to be able to navigate through without recession." — Mark Sandy: Mark’s core thesis that consumer spending can prevent a recession. "It's a slow session." — Chris Dorides: Chris’s shorthand for a soft landing/no-recession baseline.

Implications: Near-term consumer spending should keep the economy afloat, but household resilience is likely to weaken as savings normalize, debt costs rise, and labor growth slows. Watch late-2023/2024 for the real stress test.