Scotia today is out with a pair of charts that indicate what's happening and what could be coming.
They note that deposits held in US bank accounts are roughly US$2T above what the pre-pandemic trend would suggest.
When that runs out and how consumers behave afterwards will be critical for the US economy. Estimates for when the excess runs out range from mid-year to year-end.
The second chart is a swift decline in hiring intentions for small businesses and how that's historically been a good predictor of a rising unemployment rate.
Here is how they see it:
Investors are getting tired of hearing about a recession that is not coming. What we have seen instead is a slow loss of economic momentum, with pockets of recessionary data. Still, most leading indicators are flashing red. Despite intense inflationary pressures, and a sharp rise in rates, consumer spending is holding much better-than-expected. A resilient job market partly explains consumers’ resilience, but also excess savings accumulated during the pandemic. As illustrated in Exhibit 1, deposits held in US bank accounts are roughly US$2T above what the pre-pandemic trend would suggest (2011-2019). Hence, consumers can continue to burn cash on travels, restaurants, and other luxury items despite the sticker shock. Granted, some money might be leaving banks in search of higher yielding opportunities, but overall, savings are likely diminishing from elevated levels. Unless the job market weakens quickly, consumers still benefit from a decent cushion to absorb higher prices. Recall the job market is not a leading indicator, but rather one of the most lagging economic indicators. Moreover, we note that cracks in the strong job market story have started to emerge. The net percentage of US small biz planning to hire in the next few months has been in free fall for several months now, which usually lead to an increase in the unemployment rate as shown in Exhibit 2.
It's all setting up for a delicate balancing act where the Fed will have to choose the right time to pivot that both caps inflation while engineering a soft landing. That's no easy task but currently the risks are tilted towards the Fed holding rates too high for too long, especially with more talk of a rout in US commercial real estate.
