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“Twofer Tuesday” was a radio gimmick. On Tuesdays, the classic rock station local to ITR Economics’ southern NH headquarters used to (still does?) entice listeners by playing two songs in a row from a given artist. Instead of following up Tom Petty and the Heartbreakers with Cheap Trick, for example, the station would play a second song from Tom Petty and the Heartbreakers – a twofer. It was double-edged. If you happened to like Tom Petty or whoever, then great. If you did not, you got a double shot of tedium.
The US consumer, too, has a sort of twofer going on today – a “tightness twofer.” The alliteration is similar, but this is something different. Rather than two similar things, this twofer involves opposing forces.
Labor Market Tightness
There has been some easing in labor availability issues amid slowing macroeconomic growth, and there will be more ahead when the macroeconomy enters into a recession late this year or early next year, depending on what metric you are looking at. However, even with an easing of some of the pressure, we expect the labor market will remain tight. According to data from the US Bureau of Labor Statistics, there were an average of two job openings for every unemployed person in 2022. Contrast that with the 10 years (2010−2019) leading up to the pandemic, in which that dynamic was reversed and then some, with 2.3 unemployed people for every job opening. Today’s companies are working hard to keep existing employees and woo new talent.
This labor market tightness works in the consumer’s favor. It suggests that inflation-adjusted personal income will rise in 2023. That means the consumer has the means to keep their critical economic cog spinning as we head toward 2024.
Savings also have the potential to become tight. On average for the year, consumers saved 3.7% of their disposable income in 2022 versus an average of 7.3% for the 10 years before the pandemic. This contrast does not at this point indicate a squeezed consumer, because during the pandemic, savings rates were unusually high due to stimulus. Furthermore, ITR Economics’ analysis of the deflated US personal savings balance shows that, cumulatively, consumers’ savings are still up 11.7% − in real terms − from where they were just before the pandemic’s arrival.
However, that comparison was at 15.5% at the start of 2022. The cushion is still relatively large, but inflation seems to be both cutting into consumers’ actual savings and influencing their saving behavior. If this trend were to continue, consumers could find themselves in tighter straits. Further, as a balanced labor market is one prong of the Federal Reserve’s mandate, inflation does not have to be the sole perpetuator of such a trend.
The tightness twofer – labor market and, potentially, savings – represents a balance. If jobs were to become relatively scarce, the balance that exists today would be threatened. A deterioration in the twofer balance is expected for 2024; a significant imbalance could make the recession in 2024 steeper than we are anticipating.
Note that other consumer metrics remain strong – saving or not, consumers have the means and will to keep up with their debts. In December, we wrote that the US Credit Card Delinquency Rate was below the pre-COVID-19 10-year average of 2.80%. It still is, but it has crept up to 2.34% (fourth quarter of 2022) from the 2.07% (third quarter of 2022) we reported in December. Mortgage delinquencies of 90 or more days were also up from the third quarter, but at 0.43% are still historically low and just a hair above the record low (which happened to occur in the third quarter). Auto loan delinquencies declined 16 basis points in the fourth quarter and were 25 basis points below the trailing 10-year average.
We have written frequently of late on the Federal Reserve’s outsized influence on the severity and duration of the upcoming recessionary cycle. The consumer’s role ties into that. The degree to which the Fed pursues a rebalancing of the labor market – part of the body’s two-pronged mandate – will impact the balance outlined above. Follow along with us for the latest updates on the Fed. Going forward, our weekly Fed Watch videos with ITR Economics CEO and Chief Economist Brian Beaulieu will be available to our subscribers and clients.