Gary Shilling: U.S. Economy Is Doomed Without Consumer Spending

Of course, the global political, economic and financial disruptions sired by Russia’s invasion of Ukraine add additional recessionary pressures.

‘In the Hands of Households’

So, the U.S. economic outlook is in the hands of households, and their purchasing power is falling. Average hourly wages rose 5.6% in March from a year earlier, the Labor Department said Friday, but as impressive as that is, it’s still below the 7.9% jump in the Consumer Price Index.

And households are reluctant to spend their accumulated savings, with the University of Michigan’s sentiment survey revealing a 30% plunge in confidence in the last year.

Furthermore, there’s no evidence that households foresee inflation staying elevated in coming years and therefore will rush to buy goods now before prices rise even further, as they did in the late 1960s and 1970s.

Such excess demand strains inventories and capacity, so prices rise, confirming inflation expectations and generating a self-feeding spiral. Today, however, New York Fed surveys reveal that consumers anticipate annual inflation of 3.8% over the next three years.

Also, household spending power is dampened by pandemic-inspired labor force dropouts. Labor participation rates of 68.3% for men and 56.6% for women remain below pre-pandemic levels of 69.3% and 57.9%. In addition, 1.5 million more workers have retired earlier than implied by past trends, according to the Dallas Fed.

Instead of spending their savings, Americans continue to reduce their debts in relation to their after-tax incomes. The appreciation in owner-occupied houses and stock portfolios since the beginning of the pandemic are also potential sources of funds to fuel spending.

But the predominant owners of those asset classes are high-income households that already have their spending wants and needs met and don’t respond much to asset price fluctuations.

After-tax household income jumped with each of the three stimulus rounds, but consumer spending fell after the first round in 2020 and barely budged with the second and third payments in 2021. Since the pandemic struck at the beginning of 2020, after-tax income has risen by $1.7 trillion, but consumer spending has increased by little more, or $1.9 trillion.

With real incomes falling and U.S. consumers reluctant to spend their accumulated savings from pandemic-related stimulus, much less outlays from current income, economic growth this year will be minimal. And it may be negative, as earlier inventory-accumulation is reversed.

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Gary Shilling is president of A. Gary Shilling & Co., a New Jersey consultancy, a registered investment advisor and author of “The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation.” Some portfolios he manages invest in currencies and commodities.

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