Comment: Economy buoyed by consumers with $500 billion saved up

Consumers may be able to hold off recession fears and bring the soft landing the Fed has hoped for.

By Robert Burgess / Bloomberg Opinion

It may be a cliché, but there’s a lot of truth in the saying, “Don’t bet against the U.S. consumer.” The latest evidence came Tuesday when retail sales among a control group that is used to calculate gross domestic product exceeded forecasts for the fourth straight month. This time they rose 0.7 percent for April as measured by the Commerce Department, topping the 0.4 percent median estimate of economists.

When it comes to predicting the spending habits of Americans, economists are looking clueless. Despite elevated levels of inflation and interest rates, consumers are hardly cracking as many have predicted. Instead, they are helping to increase the odds that the Federal Reserve can bring the economy in for a mythical “soft landing,” avoiding a deep recession that throws millions out of work and does lasting damage.

As for why economists keep getting it wrong, it’s largely because they are still applying rules from the pre-pandemic playbook that are no longer relevant. There are no textbooks that explain what will happen in an economy that stopped abruptly, shed some 17 million jobs and contracted 31 percent only to quickly rebound with the help of some $5 trillion of free-money government programs. Those repercussions lasted throughout 2022 and are arguably still being felt.

One thing we are learning now is just how fiscally responsible consumers became during the pandemic era. The Federal Reserve Bank of New York released data on Monday that showed total consumer debt fell to 64 percent of gross domestic product from 85 percent in the first quarter of 2008, according to Bleakley Chief Investment Officer Peter Boockvar. Data compiled by Bloomberg puts it at about 74 percent at the end of 2019. This sort of flies in the face of the narrative that Americans have loaded up on debt over the last year or two to make ends meet. On the contrary, it shows that they are in strong shape financially to weather this current bout of faster inflation — which is decelerating and may yet prove transitory — and higher borrowing costs.

But what about Home Depot, which said on Tuesday that it was cutting its outlook for the year after first-quarter sales dropped more than expected? Isn’t that a sign of consumer weakness? Perhaps not. Home Depot tends to benefit when home sales are soaring. But residential transactions have cratered, in part due to near record-low inventories of existing homes available for sale rather than a lack of consumer confidence. The National Association of Realtors puts supply at 2.6 months, half of what it normally has been going back to the start of 2000. The lack of inventory is largely due to homeowners, who were lucky enough to refinance or buy back in 2020 and 2021 when 30-year mortgage rates were around 3 percent, not wanting to give up those low borrowing costs by selling.

So, the only game in town for many potential buyers is the newly-built part of the market. That may be a big reason why, also on Tuesday, the National Association of Home Builders and Wells Fargo said their joint measure of sentiment among developers for May rose to the highest in 10 months and exceeded the forecasts of economists, who expected no change in sentiment.

The New York Fed’s Liberty Street Economic blog explained in great detail this week how consumers greatly benefitted from those mortgage rates back in 2020 and 2021, and will continue to benefit. The researchers estimated in the blog that between the second quarter of 2020 and the fourth quarter of 2021, some $430 billion in home equity was extracted through mortgage refinancing. Of the 14 million or so mortgages that were refinanced during the period, 64 percent were deemed “rate refinances,” which they classified as those with a balance increase of less than 5 percent of the borrowing amount. For rate refinancers, the average monthly payment dropped by $220; for “cash-out” refinancers, the average amount extracted was $82,000, and the average monthly payment increased by just $150.

Another way to look at this is that about 5 million borrowers extracted a total of $430 billion in home equity via refinancings; and 9 million refinanced their loans without taking out any equity, resulting in an aggregate reduction of $24 billion in their annual housing costs. “The improved cash flow generated by the recent refinance boom will potentially provide significant support to future consumption,” the researchers concluded.

How far into the future? A separate paper released by the Federal Reserve Bank of San Francisco estimates that there is still much excess savings in the economy; some $500 billion. These are savings over and above what would be expected in the normal course. “The distribution and allocation of excess savings and wealth across the income distribution suggest that households on average, including those at the lower end of the distribution, continue to have considerably more liquid funds at their disposal compared with the pre-pandemic period,” the paper’s authors concluded. “We expect that these excess savings could continue to support consumer spending at least into the fourth quarter of 2023.”

If there’s been one constant in an economy that has continuously surprised in the last three years, it’s that betting against American consumers has been a losing proposition. Someday it may pay off, but not yet.

Robert Burgess is the executive editor of Bloomberg Opinion. Previously, he was the global executive editor in charge of financial markets for Bloomberg News.

Talk to us

More in Opinion

Lummi Tribal members Ellie Kinley, left, and Raynell Morris, president and vice president of the non-profit Sacred Lands Conservancy known as Sacred Sea, lead a prayer for the repatriation of southern resident orca Sk’aliCh’elh-tenaut — who has lived and performed at the Miami Seaquarium for over 50 years — to her home waters of the Salish Sea at a gathering Sunday, March 20, 2022, at the sacred site of Cherry Point in Whatcom County, Wash.

The Bellingham Herald
Editorial: What it will require to bring Tokitae home

Bringing home the last captive orca requires expanded efforts to restore the killer whales’ habitat.

Editorial cartoons for Tuesday, June 6

A sketchy look at the news of the day.… Continue reading

A map of the I-5/SR 529 Interchange project on Tuesday, May 23, 2023 in Marysville, Washington. (Olivia Vanni / The Herald)
Editorial: Set your muscle memory for work zone speed cameras

Starting next summer, not slowing down in highway work zones can result in a $500 fine.

File - A teenager holds her phone as she sits for a portrait near her home in Illinois, on Friday, March 24, 2023. The U.S. Surgeon General is warning there is not enough evidence to show that social media is safe for young people — and is calling on tech companies, parents and caregivers to take "immediate action to protect kids now." (AP Photo Erin Hooley, File)
Editorial: Warning label on social media not enough for kids

The U.S. surgeon general has outlined tasks for parents, officials and social media companies.

Anabelle Parsons, then 6, looks up to the sky with binoculars to watch the Vaux's swifts fly in during Swift's Night Out, Sept. 8, 2018 in Monroe. (Olivia Vanni / The Herald)
Editorial: Birders struggle with legacy, name of Audubon

Like other chapters, Pilchuck Audubon is weighing how to address the slaveholder’s legacy.

Comment: Biggest part of debt limit deal was the dealing

The White House and Congress showed they could find a path that can make real progress in reducing the debt.

Comment: Do we need refuge from drag shows and naked staues?

GOP lawmakers should know that most parents have bigger concerns than men in dresses and Michelangelo’s David.

Comment: To save Twitter, Musk should take it public

It goes against conventional wisdom, but then Musk has always defied how others get business done.

Comment: Milton Friedman was right; CEOs should focus on profit

Stumbles by Target and Budweiser show why wading into politics brings too many variables into the mix.

Most Read