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What I Care About This Week | 2022 Aug 1

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by Franklin J. Parker, CFA

The Summary

The Details

There is a bit of a mystery developing in the US economy.

Relative to inflation, consumers have seen their wages fall over the past year. Despite this drop in income, consumers have more-or-less maintained their purchasing power. Now, enter the mystery: the amount of consumer credit outstanding has been falling over the past months. So where are people getting the money?

The answer is likely personal savings. Since the pandemic high, personal savings has dropped to a multi-year low, and appears to be continuing to fall. Since consumer credit has also fallen dramatically, we might conclude that households are tightening up their balance sheets—possibly in anticipation of some difficult times.

Of course, households will not spend down their savings forever. Once that limit is reached, consumer spending will have to be drawn from credit, or curtailed altogether. Investors would do well to keep a close eye on these figures over the coming months.

Chart of the Week

I’ve read many an article about how the Fed’s rate hikes are likely to cause a recession. While I do not necessarily disagree, the last 30+ years of history has shown us is that the Fed is actually pretty good at recognizing when a recession is on the horizon, and cutting rates to get ahead of it. In fact, the Fed has not once—in the last 30 years of history—increased rates immediately ahead of a recession. There are always exceptions, of course, and this unusual environment may well be one, but investors have some reasonable basis to follow the Fed’s actions on this.

At the moment, the Fed’s behavior suggests a recession is not immediate.

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