"Running on Empty"

There's an old Jackson Brown song titled, “Running on Empty”. In the song Jackson sings, “I

don't know where I'm running now, I'm just running on”.  That pretty much sums up recent economic activity. Things keep running along, but nobody seems quite sure where we're headed. 

Much of this uncertainty is due to the unprecedented monetary policies the Federal Reserve has followed since 2020. They have taken us into a brave new world of economic experimentation where (almost) no one has gone before. In 2020 they increased the amount of money in the economy by $6 trillion or 40%, vs. the typical 2%-4% annual increase. That's about $20,000 for every person in the U.S. Next, they “loaned” a chunk of that to the U.S Treasury through bond purchases. With cash in hand, Congress subsequently authorized three rounds of stimulus checks totaling up to as much as $3,200 per adult and up to $2,500 per child for “qualifying” households.

No doubt, some needed those stimulus checks as a financial life preserver, but many saw them as a financial windfall sparking a tsunami of consumer spending. At the time the thrill of “free” money drowned out anyone objecting to being drafted into the Fed's grand economic experiment. Arguments that all the new money would  ignite the fires of inflation fell on deaf ears. Two years later, the flow of stimulus checks have stopped, the wave of economic spending has subsided, and the economic tide is headed out. I see three trends indicating consumers  burned by inflation are now running on empty. 

First, on an inflation adjusted basis, consumer spending typically grows in the 2%-4% range per year. Last year we saw consumer spending surge 8.3%. This year we'll probably fall below 2%, and the Federal Reserve's rate hikes will reinforce that downtrend. Second, at the end of 2019 consumer savings was around $1.4 trillion. After tripling as stimulus checks hit bank accounts, savings are now half of what they were before those checks. In other words, the average consumer has spent all their stimulus money and is now rapidly depleting their own savings. That's an ominous trend ahead of a likely recession next year. Third, consumers used part of the stimulus money to pay down “revolving credit” composed of credit cards and other personal loans. At the end of 2019 revolving credit totaled around $1.1 trillion and this was paid down to $970 billion last year. Now, it's back up again to around $1.2 trillion.

It's unclear if these trends are due to changes in discretionary spending patterns, or are a reflection of consumers being forced into changes just to make ends meet. In either case they show household finances are going in reverse.

Consumer spending represents about 68% of our economic activity, so this holiday spending season will give us some important economic insights. Let's hope the Fed's experiment ends well, and Santa refills our tanks. For patient investors waiting to buy “low”, the new year may just treat them to a nice supply of post holiday bargains.

Frank Rizzo, CERTIFIED FINANCIAL PLANNER ^TM

The opinions in this material are for general information only and not intended to provide specific advice or recommendations for any individual. The economics and market forecasts set forth in this material may or may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Investing includes risk, including fluctuating prices and loss of principal.