Commentary
The rising cost of living, tightening credit, slowing consumer spending, along with declining real wages and retrenchment in the jobs market, are each conspiring and threatening to move the U.S. economy into recession later this year. Despite lower headline Consumer Price Index (CPI), inflation is still taking its toll on American families.
Just released CPI data shows the headline inflation figure came down from 6 percent in February to 5 percent in March. This was the lowest overall price increase in nearly two years, and it was largely driven by a 6 percent decline in energy prices. However, the headline number masks continued high inflation in two of the most important spending categories for working and middle-class Americans. Households are feeling the pressure as prices of food and shelter continue to climb faster than overall CPI, and importantly, faster than wages.
For half of American families, housing and food comprise half of total household expenditure. Unfortunately, the consumer price indexes for food and shelter not only remain persistently high but also, in the case of shelter, continues to grow. For example, food prices increased 8.5 percent in March, a modest decrease from the 8.8 percent annual increase one year ago (March 2022). Shelter increased 8.2 percent, a significant increase from the 5.0 percent increase the previous year. In other words, food and shelter prices are up 18 percent and 13.6, respectively, over two years. Families are struggling to keep up.
Nominal hourly wages are up about 4 percent since last year, meaning that in inflation-adjusted terms, real wages are lagging headline inflation, and substantially trailing for important spending categories such as housing and food. According to the U.S. Bureau of Labor Statistics, real average weekly earnings are down by 1.6 percent on an annual basis as of March 2023.
As is often the case, the situation is worse for the poorest in our country. For the bottom 20 percent of American households, income before taxes is down 22.7 percent from 2007. These are nominal figures. The real (after inflation) decrease in purchasing power is much more severe.
Most Americans are feeling the pinch of rising prices and, as a result, running out of ways to maintain their household expenditures.
Last year, household debt grew at its fastest pace in 20 years, and stood at an all-time high of $16.9 trillion by December 2022. This reflects the fact that households struggled to keep up with rising inflation and resorted to taking out debt. Credit card balances reached all-time highs, which by the end of the year peaked at some 6 percent above pre-lockdown levels. At the same time that consumers were loading up on credit card and other debt, they were draining their bank accounts. The personal savings rate fell below 3 percent in 2022, nearing all-time lows, while personal savings balances were depleted to below twenty percent of 2020 highs.
This process—of borrowing from tomorrow to pay for today’s expenses—has run its course.
Working- and middle-class parents are running out of options to keep their families fed, sheltered, and clothed. Consumer spending has been essentially flat for several months despite rising price levels, and is likely to turn negative in the second quarter. One of the telltale signs of a slowing economy is employment.
Recent data from ADP, one of the leading U.S. payroll companies, shows that jobs growth in March was anemic, coming in at just two-thirds of forecast and more than 44 percent below February’s levels. The pace of layoffs is increasing.
In the financial economy, the banking crisis that manifested in March is accelerating a process already underway of tightening credit to American businesses and households. As the perception of risk goes up, the cost of borrowing will increase, and lending standards will tighten. Shrinking credit availability and rising costs will likely lead to slower growth in the second quarter.
In the background of all of this, OPEC+ (the alliance of oil-producing countries led by Saudi Arabia, including Russia) announced last week plans to limit crude oil production in order to maintain higher prices. These announced cuts have roiled energy markets and ensured that the United States will continue to pay more for its imported energy needs. Look to see a resurgence of energy inflation in the second quarter.
In summary, a recession in 2023 is now much more likely, and American households will continue to be squeezed. The pain may not go away quickly, but reopening America’s domestic energy productive capacity would certainly go a long way in providing relief.
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
