Tuesday, November 22, 2022

The economic screw tightens


There are conflicting views on the state of US consumers, and whether or not they're able to go on spending as they have.  For example, the Wall Street Journal reports:

Consumers built up unprecedented savings buffers during the Covid-19 pandemic, thanks to government stimulus and fewer opportunities to spend ... Economists estimate that headed into the third quarter of this year, households still had about $1.2 trillion to $1.8 trillion in “excess savings”—the amount above what they would have saved had there been no pandemic.

That buffer, combined with a strong labor market and rising wages, has helped consumers continue spending in recent months, even with inflation and mortgage rates at multidecade highs. U.S. retail sales posted their strongest gain in eight months in October.

Nonetheless, there are also signs they are working their way through that buffer, and an end is in sight.

This can be seen in how much consumers are saving and borrowing monthly.

In 2019, before the pandemic hit, households saved 8.8% of their disposable income. That saving rate jumped to 16.8% in 2020, the highest annual saving rate on record, as government stimulus and unemployment benefits left many consumers flush with cash but with few opportunities to spend during lockdowns.

In 2021 the saving rate moderated to 11.8%, and it has fallen further during 2022. The rate has been below 4% for seven straight months and in September it stood at 3.1%, near its lowest level since the 2008 financial crisis.

This suggests that consumers are spending more and saving less of their monthly income than normal, because inflation forces them to spend more on higher-priced goods and services.

Consumers had also used their hefty savings to pay down credit-card debt. There are signs that has changed too. The Federal Reserve Bank of New York said credit-card balances increased 15% year-over-year in the third quarter, the largest increase in over two decades. The rate of delinquency, that is debt more than 30 days past due, rose across income groups.

These changes should steadily chip away at households’ mountain of savings.

. . .

“One of the things that’s assisted that thus far is relatively strong balance sheets among consumers assisted by stimulus payments,” Walmart’s finance chief, John David Rainey, told investors Tuesday. But because consumers are stressed by inflation, “that’s not going to last forever. So that’s why we take a rather cautious view on the consumer.”

With the labor market still strong, economists don’t expect consumers to dramatically rein in their outlays until they see unemployment rising and become concerned about losing their jobs. Economists surveyed by The Wall Street Journal last month expected employers will start cutting jobs in the second and third quarters of next year.

There's more at the link.

From a high-level perspective on US consumers, that's all very well.  I daresay the wealthiest 1% of consumers - even, perhaps, the wealthiest 10% - have, indeed, increased their savings thanks to stimulus cash.  However, I question very strongly whether the poorest 90% of US consumers (among whom are my wife and myself) have been able to do so.

From a wider economic perspective, the trouble signs are already flashing deep red.

Ocean carriers are said to be in “panic mode” as bookings from China to North Europe and the US west coast tank, causing FAK rates to plunge to new depths.

Despite aggressive blanking that has reduced weekly capacity on the tradelanes by more than a third, the lines have failed to slow the precipitous fall in short-term rates and, are arguably fuelling the fire by offering sub-economic spot rates via their digital platforms.

. . .

Meanwhile, on the transpacific, short-term rates from China to the US west coast are sinking to sub-economic levels, dragging down long-term rates as carriers are forced to offer customers temporary reductions on contract rates.

Indeed, Israeli carrier Zim told The Loadstar this week it had been obliged to agree pricing reductions with transpacific contracted customers to protect its business.

“The demand and volume was not there, so we had to deal with a new reality and engage with our customers,” said CFO Xavier Destriau.

According to the latest reading of Xeneta’s XSI spot index, its US west coast component was flat this week, at $1,941 per 40ft, having declined by 20% so far this month, while east coast rates were down 6% on the week, according to Drewry’s WCI, at $5,045 per 40ft.

Again, more at the link.

Something like 70% of US GDP is driven by consumer spending.  Consumer goods are largely imported from the Far East.  The companies that, until recently, were importing those goods at such a rate that freight charges were well into five figures per container, have stopped ordering them.  That doesn't sound to me like they're confident that the US consumer has lots of spending money available, whether savings or credit.  It sounds rather as if they're seeing the crash coming, and making sure they don't have warehouses full of goods they can't sell when it arrives.

Locally in north Texas, I'm seeing several signs that consumers are "tapped out", no longer able to spend as much as they used to.  Several friends and acquaintances work in the restaurant and food delivery sector.  Universally, they're complaining that tips have all but dried up, and when they're given, the amounts are considerably less than they're used to getting.  One recently told her boss that unless the restaurant was prepared to pay extra to staff to compensate for the lack of tips, she would be leaving and looking for some other kind of work.  Needless to say, the restaurant can't afford to do that, because the lack of trade is affecting it too:  so she's looking around right now, and not finding much available.

On the subject of declining tips, that seems to be a national problem.  The New York Post reports:

Inflation might be turning Americans into grinches this holiday season, new data suggests.

In a survey of 1,000 consumers and 165 restaurant owners and operators across the US this month, just 43% of consumers are now tipping their servers 20% or more, a significant decline from 56% of customers last year. That’s according to a recent survey from restaurant technology company Popmenu, first reported by MarketWatch.

A separate survey from PlayUSA, an online gambling site, polled 1,006 people and found 17% of Americans are tipping less because of rising costs, while 60% of Americans said they wanted to ditch tipping altogether.

Restaurant owners across the Big Apple say the penny-pinching is real.

. . .

Matt Schulz, chief credit analyst at Lending Tree, an online loan marketplace, said that inflation has made it harder for Americans to give liberally. 

“Rising prices have shrunk Americans’ financial margin for error to basically zero. When that happens, people need to cut back expenses to help make ends meet, and one of the easiest ways to do that is by tipping less,” Schulz said.

But he noted that being a lousy tipper has moral implications.

“A couple bucks here and there may not make too much difference in our own lives, but for men and women who rely on tips to survive, it is a really, really big deal when people tip less,” he said.

More at the link.

I'm also hearing from people I know who work at charities that contributions are down, particularly cash, and even thrift shops are getting less and less donations of acceptable quality.  People seem to be hanging on to what they've got, rather than giving it away and buying new products - another sign of the economic times.

Finally, there appears to be a surge across the country in shoplifting of basic consumer products.  People who can't afford to buy them are resorting to simply taking them.  A friend working in retail says that personal hygiene items are particularly affected - deodorant, makeup, dental care, etc.  Some appear to be on the list of organized crime rings, who have dozens of members stealing such products for resale on Amazon and other outlets.  It's got so bad that in some cities, such supplies are put under lock and key rather than allowing customers to take what they want and put it in their carts or baskets.

When I put all those factors together, I don't think that the US consumer still has untapped savings, or is still able to buy what they need without too much effort.  Rather, I think that many - perhaps most - US consumers are feeling the pinch, and are tightening their belts already in anticipation of things getting worse.  This isn't nearly as rosy a picture as that Wall Street Journal article tried to present.

I don't think households have a "mountain of savings" at all - they have a "cellar of debt".  It's filling up fast, and it's about to overflow.



Aesop said...

WSJ is smoking pure crack by the barrel if they think people increased their COVID savings. Most spent down to their bottom dollars, then went into hock on plastic. This is why credit debt is at record levels.

Which is why demand for goods made of Chinesium is into negative numbers. WallyWorld and Boutique Targét aren't even restocking basic items like socks and underwear except quarterly. "Just in time" has morphed into "maybe next April".

As far as tipping, when, for just one example, the lowest-priced steak and potato meal with a salad bar add-on at Sizzler has gone from under $20 to almost $30 in less than 4 months, you can bet that a customer isn't going to increase the tip from $4 to $6 out of the goodness of their heart.

A footlong sub sandwich I used to get for under $10 is now going for nearly $20. That was the last time I'll be patronizing that particular establishment, at least unless my employer hands me a 100% pay raise, which will be about the 12th of Nevergonnahappen.

Even McAwful's prices have gone for $5 to nearly $10 for any of their mini-size burger combos. Like paying their halfwit counter help coke-slingers $16/hr wasn't already insane, even after replacing 2/3rds of them with computer kiosks covered with other people's fecal bacteria.

Anybody painting rosy pictures of how it really is are certifiably intoxicated, insane, or both.

Jonathan H said...

The economy is clearly already deep in a recession; the Dems and media are desperate to ignore it until they have someone else to blame it on - my guess is that once the Republicans have held the House for a couple months, the Dems will admit the recession and blame it on Republicans not supporting all their bills.

I know relatively well off people who turned up AC this summer and turned down the heat to save money. Where I live there are significant issues related to less overtime and tighter budgets at major employers mostly due to high fuel prices and equipment down for lack of spare parts on heavy equipment and mechanics to install the parts that are available.
And like mentioned above, McDonald's has gone up massively in price and down in service to the point that gas station food is cheaper, better, and faster.
I'm waiting for real estate prices to drop so I can upgrade, but so far changes have been small despite rising interest rates...

Who Struck John said...

Trans-Pacific freight is not as good a proxy as you'd like. Because both a west coast longshoreman's strike and a railroad strike were foreseeable in the third quarter, shippers reacted by shifting cargoes to east-coast routes and by pulling cargoes into the US ahead of June 30th. If you look at overall container volumes, they are down but not so dramatically as trans-Pacific volumes.
I agree we are in recession. This will be a rude awakening for the under-40 crowd who have never experienced high inflation and economic contraction at the same time.

nick flandrey said...

I agree that they are full of carp. NO WAY did people make more on unemployment than by being employed, nor does anyone still have stimulus cash hanging around. For that matter anyone who started on unemployment at the beginning of the lockdowns ran out over 2 years ago.

When they handed the stimulus out, they remarked about how it was all being spent, or used to pay down debt. Now that money is still somehow available? And they act like the stimulus was a lottery sized check... it wasn't.

That money is LONG gone.

As far as cutting back, I see it at all economic levels. My very well off client is worried about his retirement in 22 months, having watched his savings/investments shrink by ~30%. My kids' college fund is similarly down. Wife's company is looking at 2 YEAR lead times for the stuff they sell. Can't sell what you don't have.

I've started pulling back. I even cut the number of bacon slices I cook for the family breakfast from 12 to 10. I found the store brand cookies are better than name brand, and half the price. I'm putting more rice on the table than any time in the past 15 years.

We're not 'short' yet, but it doesn't hurt to start pulling back and saving what we can.


James said...

Yup, I have been spending in excess of my monthly income to increase my preps from one year to three, depressions historically are not short term things. My study of history has shown me that in times of crisis, government can be counted on to make things worse.
A friend of mine's husband does delivery for a grocery chain as a second job, his tips have shrunk drastically.

Justin_O_Guy said...

It's Not Just that things are getting tight. To me the thing that is weighing heavily on peoples minds is we don't see anything coming that is going to change the direction we are going. Frankly I'm surprised at how much resiliency the economy has showed after the government tried so hard to destroy it. I'm waiting for the smaller commercial properties to become vacant. That is gonna reverberate through the economy. None of the problems we are seeing were not easily predictable based on the lockdown of society. Funny thing how decisions were made. Mom and Pop stores were shut down. But the big box stores where hundreds would cross paths were left alone. I wonder if lobbyists could have used that moment to crush their competition. Naah, nobody would do That, right?

HMS Defiant said...

Oddly enough, my tips stay the same, 15%. The notion that tips had to go up is nonsense and to be honest, post covid madness I don't tip for picking up togo orders either. the entire idea of tip was put on the table and found wanting in many instances and when I find it wanting, I don't tip 15%. That is reserved for good service and frankly the service these days in some places is terrible.

To fail to see that the entire world is sliding into a killer recession is kind of idiocy stoked on steroids and woke. This is the beginning of the long fall. China slit its throat with COVID and Japan aged out of the workplace while Europe slit its energy throat with Russia and the long war over a Russian province that will likely starve and freeze to death surrounded by plenty of ammo and guns.

Those who still write for the MSM still don't get it but then most of them are married to the movers and shakers and will never get it. You know, until they're the first against the wall.

HMS Defiant said...

I typed all of that for nothing. hhhhmm. won't do that again.

Peter said...

@HMS Defiant: No, it wasn't for nothing. I'm afraid I've had to implement comment moderation, due to spammers becoming more and more of a problem. If you leave a comment, it'll show up as soon as I can check my comment moderation queue and approve it.

AJ said...

Sitting here on the other side of the Pacific in AU, this tipping thing all seems a bit odd. We don't generally do tipping except for extra-good service. Expectation is that businesses pay their staff a decent living wage to do a good job, and goods & services are priced accordingly. To do less than this is regarded by most people as wage-theft. So, as people spend less, it impacts the whole business, not just the lowest paid employees. IN THEORY... the weakest businesses fail, and the strong pick up their trade. Good workers find work elsewhere, be it self-employed or as employees. It's a bit Darwinian, but it mostly works.

And yes, everything here has gone up in price too. Executive renumeration & dividends have soared, while worker wages (the 95% of people who would buy stuff if they had spare cash) have stagnated.

To quote Peter Zeihan: the end of More"". for most.

Maniac said...

I called the bank that handles my company's 401K and told them to stop taking money out of my paychecks. Ain't gonna happen.

Jonathan H said...

Ood points.
Trans Pacific shipping, defined as coming in to Long Beach, Seattle, Portly, etc has been dropping for years as costs in those ports keep rising and the costs of other port (Charleston, Savannah, Jacksonville, Houston, etc) keep dropping. Also, those ports are close enough to customers for trucking to be a viable alternative to rail.

I assume that Biden will wait to admit the recession until he has someone else to blame it on.
The MSM will both deny it until he admits it and be among the last to feel it - confirmation bias, the old "How could Nixon win, I don't know anyone who voted for him".