Wages and Savings

DANIEL LACALLE is chief economist at hedge fund Tressis and author of “Freedom or Equality,” “Escape from the Central Bank Trap,” and “Life in the Financial Markets.” Daniel Lacalle

Unsettling Trend in Wages and Savings

There are important clouds on the horizon for the American consumer

The u.s. consumption figure seems robust. A 0.9 percent rise in personal spending in April looks good on paper, especially considering the challenges that the economy faces.

This apparently strong figure is supporting an average consensus estimate for the second-quarter gross domestic product (GDP) of 3 percent, according to Blue Chip Financial Forecasts. However, the Atlanta Fed GDP nowcast for the second quarter stands at a very low 1.9 percent. If this is confirmed, the U.S. economy may have delivered no growth in the first half of 2022 after the decline in the first quarter, narrowly avoiding a technical recession.

The evidence of the slowdown isn’t just from temporary and external factors. Consumer and business confidence indicators present a less favorable environment than the expectations of an optimistic market consensus. According to the FocusEconomics aggregate of estimates, the U.S. economy should grow by a healthy 3.6 percent in 2022, helped by very strong third and fourth quarters at 4.9 percent and 5.5 percent growth, respectively. The main driver of this surprisingly resilient trend is the unstoppable consumption estimates. However, there are important clouds on the horizon for the U.S. consumer.

We can’t forget that consumer figures have been relatively solid, but at the same time, there has been a collapse in saving, with the personal saving rate falling to a 14-year low of only 4.4 percent in April from 8.7 percent in December.

The U.S. personal saving rate is now 3.3 percent lower than its pre-pandemic level, and the University of Michigan consumer confidence index fell in early May to an 11-year low of 59.1 from 65.2, deep into recessionary risk territory.

A plummeting saving rate is deeply concerning. It proves that consumers are suffering from elevated inflation as real wages remain in negative territory.

“From April 2021 to April 2022, real average hourly earnings decreased 2.3 percent, seasonally adjusted,” the Bureau of Labor Statistics website reads.

Put these two figures together— real average earnings down by 2.3 percent and the household saving rate almost halved—and families are struggling, wages are being dissolved by inflation, and savings are being wiped out. Consumer credit card debt is almost at all-time highs. Balances rose to $841 billion in the first three months of 2022, according to data from the Federal Reserve Bank of New York.

The astronomical level of credit card debt is arriving just as rate increases start to have a significant impact on families’ ability to repay their financial commitments.

Despite the perception of a solid economy with a tight labor market and rising nominal wages, the reality of the United States is that massive deficit spending and inflationary policies are hurting the middle and working classes. Unemployment may be low, but employment-to-population and labor participation rates remain poor, and the so-called “great resignation” is starting to reverse as citizens struggle financially.

It seems very difficult to believe that consumers will end the 2022 fiscal year with the current levels of consumption growth, but the real challenge will appear in 2023. The buffers that families and businesses built in 2020 have all but disappeared.

In the other G-4 economies, the situation isn’t much different. With the latest data available, the household saving rate in the eurozone, Japan, and the UK has fallen below pre-pandemic levels, according to JP Morgan.

The key is inflation. If consumer prices continue to be elevated into the third quarter, it’s very hard to believe that citizens will be comfortable depleting savings to continue consuming at the same pace as the first half of 2022. Developed economies’ families aren’t used to high inflation and seem to be accepting the mainstream idea that price increases will drop in the next few months. However, this may be a bad idea. Food prices are at all-time highs, oil and gas prices are supported by geopolitical risks and poor inventory levels, and government deficit spending means that consumption of monetary reserves will continue to be extraordinary.

U.S. families may have been patient these past months, but they can’t perform miracles. If inflation persists, the trend in real wages and savings will inevitably lead to a slump in demand and a higher recession risk.

U.S. families may have been patient these past months, but they can't perform miracles.