- Pandemic-era stimulus is gone, and rates are much higher. It’ll make the 2023 recession hurt much more.
- Households are already feeling pressure from high inflation, slowing wage growth, and dwindling savings.
- Americans aren’t likely to get more aid in a 2023 downturn, and as their financial cushions fade, the pain will worsen.
The US economy’s post-pandemic party is over. Strap in for a pretty nasty 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 recoveries in modern history.
But that fast recovery came at a price. Inflation started to heat up in the spring of 2021, first powered by used car prices but soon spreading to gas, food, and housing costs.
The monetary-policy cops showed up at the party soon after, but by then 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. Mortgages, car loans, and credit card debt got pricier over a matter of weeks. Yet inflation charged even higher in the following months, and data published last week showed one key inflation gauge hitting a four-decade high in September.
Not only has the economy fallen short of its projections this year, forecasts of next year’s performance are even more worrying. Experts see 2023 featuring even higher interest rates, still-elevated inflation, rising unemployment, and a tougher job market for workers.
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 bastions of the post-lockdown rebound are already deteriorating, and as a new recession looms, Americans are looking less prepared by the week.
Americans are burning through their pandemic-era cash savings cushions
For starters, households aren’t as flush with cash as they were one year ago. Americans built up a $2.1 trillion savings cushion through the early stages of the pandemic as spending plunged and stimulus hit households. But they’ve spent $630 billion — roughly one-third — of that buffer already, according to the Bureau of Economic Analysis.
Total savings are still well above pre-crisis levels, but the cushion is fading fast. The rate of decline has accelerated in recent months, and as inflation continues to bite households’ finances, Americans will face the difficult choice between cutting their spending on essentials and dipping into savings they held before the pandemic.
Their day-to-day cash flow is also down. 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. Though that’s up from the June low, it lands in line with the trend seen since March and below the pre-pandemic high of $46,000.
Put simply, the average household is past its financial peak. Americans are saving less and dipping into their financial cushions more just to get by. Once that buffer wears out, weaker saving can worsen the likely coming recession. Revenues will fall, companies will cut costs by laying off workers, and aggregate spending will fall all over again.
The historically-great jobs market is probably on its last legs
The unusually tight labor market was another boon to Americans throughout the recovery, but that’s reversed course too. American companies are trimming their hiring plans amid soaring interest rates and fears of a near-term recession. Job gains in September remained historically strong, but continued a longer trend of increasingly slower growth. Job openings, meanwhile, fell in August by the most since the first months of the pandemic.
And as employers’ demand for labor cools, so does worker pay. Monthly wage gains have slowed from the rapid pace seen earlier this year and now match the pre-crisis average. After accounting for inflation, the median worker’s weekly pay is below what they brought home before the lockdowns of early 2020.
The Fed’s crackdown on inflation will cause more economic pain
The historically low interest rates that aided households through the crisis are also nowhere to be found as the Fed has been ramping up its fight against inflation. The Fed’s benchmark rate now sits between 3% and 3.25%, well above the threshold at which rates constrain, not boost, economic growth. That’s helped push mortgage rates to highs not seen since the mid-2000s housing bubble and the average credit card rate is already two percentage points higher than it was in March.
The central bank still frames its rate hikes as its best tool for cooling the price surge, but until headline inflation falls back to earth, Americans are stuck between rising costs and pricier borrowing.
It’s no wonder, then, that economists are nearly certain a recession will materialize in the next 12 months. A forecast from Bloomberg economists pegs the odds of a downturn by October 2023 at 100%. A survey of economists conducted by The Wall Street Journal saw those odds climb to 63% in October from the 49% chance in July.
Fed officials haven’t explicitly forecasted a recession, but their latest projections show growth slowing significantly next year while unemployment leaps to 4.4%.
Congress probably won’t ride to the rescue in the next recession
Americans shouldn’t expect much aid by the time the next recession comes around. Inflation is still running at a 8.2% year-over-year pace, leaving lawmakers incredibly wary of pumping more cash into the economy. Republicans are also poised to take control of the House after the November midterm elections, further dooming the chances of a bipartisan stimulus bill should a downturn materialize.
Taken together, the aforementioned trends make for a bleak outlook. The Fed has promised to keep raising rates until “the job is done,” all but guaranteeing borrowing costs will climb higher and the economy will slow further. Bringing inflation to heel is critical to ushering in a healthy economic expansion. Until then, the next recession will be made even worse by the come-down from the last downturn.
