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The American consumer has become the center of the recession debate.

That’s because the consumer isn’t entirely acting the way they should in a recessionary environment. They are still spending even as they fear an economic slowdown or recession. Don’t get me wrong, when the consumer is spending it is a good thing for the economy. But with high inflation and a shift in spending habits many wonder how long the consumer can keep up.

On paper, the country likely entered a recession in 2022 as GDP declined for the second quarter in a row in Q2. However, most experts will agree that rising unemployment and falling incomes are key characteristics of recessions. Those trends are not currently present.

To determine if things get better, worse, or stabilize from here I’ll be keeping a close eye on the consumer. At the end of the day, if the consumer has job opportunities and can make enough money and pay bills, that should help keep the economy from falling into a deep(er) recession.

Consumer check-up

Here are the three key areas I’ll be watching for changes over the weeks and months ahead. Currently many of these indicators show the consumer is healthy, though we know not all consumers are in the same boat. Keeping a pulse on the consumer will provide good clues into the trajectory of future economic growth.

  • Pay raises & job opportunityPerhaps the biggest driver of robust consumption is simply folks having jobs and earning decent pay raises. With unemployment at historically low levels, wages have been growing steadily – by about 5% year-over-year since June of 2021. The number of people quitting their jobs is elevated and job-switchers continue to receive the biggest pay bumps – a signal that the worker might still have some negotiating power. Even as talks of slowdowns in hiring pick up, the number of jobs available are still elevated.
  • Chart titled: Employees still have leverage; shows layoffs remain low and quit rates are currently elevated. Chart dates from December 2000 to May 2022. The layoff rate remained between 1% and 2% from December 2000 until February 2020, before spiking above 8% in March 2020 and quickly falling below 1% in October 2021. In May the layoff rate was 0.9%. The quit rate averaged 1.9% from December 2000 until February 2020, before dipping sharply to 1.6% in March 2020 and recovering to a peak of 3% in December 2021. In May the quit rate was 2.8%. Source: Aly Invest, US Bureau of Labor Statistics, Federal Reserve Bank of St. Louis.Job loss indicators: A more current data point for getting a pulse on employment is initial        jobless claims – a measure of the number of people filing for unemployment insurance right after losing a job. This reading has been slowly moving higher, which is a cause for some concern. However, weekly continuing claims – a measure of those that continue to file weekly to receive benefits (beyond the first week) because they remain out of work – are exceptionally low and have not trended higher. That tells me those who lose their job are able to find new work quickly. If people are not on unemployment long, that is a good sign for overall consumption.
  • Strong consumer balance sheets: Consumers are beginning to increase their use of debt, tapping their credit cards or other loans a bit more frequently than they have since the pandemic began. However, household debt service payments as a percent of income are still below pre-pandemic levels. Delinquency rates, which are a measure of late payments, have also remained historically low. That means people are still making payments and doing so on time. On top of this, most Americans are currently still net savers, barely touching more than $2 trillion of excess savings built up since early 2020. This should serve as a bit of a cushion as credit picks up.
Chart titled: Household balance sheets remain strong; delinquency status (90+ day), by loan type. Chart dates from March 2003 to March 2022. Mortgage loan delinquency rates are shown below 2% through June 2007 before rising to 9% in March 2010 and retreating steadily to 0% in March of 2022. Credit card delinquency rates were between 8% and 10% through December 2008 before rising to 14% in March 2010 and declining to about 8%, where it stood in March 2022. Source: Ally Invest, New York Federal Reserve.

 The bottom line

Spending, employment and income are key factors in determining whether we have an official recession or not. Most consumers remain in good shape to weather the current inflationary storm. There are even some signs that the cost-of-living trends might improve over the coming months. A very tight labor market and easy-to-find jobs should also help wages stay elevated even as some industries reduce hiring. I’ll be keeping my eye on the state of the consumer and key indicators as the second half of the year rolls on, but so far so good.

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Headshot of Lindsey BellLindsey Bell, Ally’s chief markets & money strategist, is an award-winning investment professional with a passion for personal finance and more than 17 years of Wall Street experience. Bell’s unique ability to connect the dots between data and real life and craft bite-sized money ideas that people can use and apply stems from her deep background as an analyst, researcher and portfolio manager at organizations including J.P. Morgan and Deutsche Bank. She is known for demonstrating why and how an understanding of all things money improves a person’s finances and overall well-being. An ongoing CNBC contributor, Bell empowers consumers and investors across all walks of life and frequently shares her insights with the Wall Street Journal, Barron’s, Kiplinger’s, Forbes and Business Insider. She also serves on the board of Better Investing, a non-profit focused on investment education.

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