Even if you put a lot of stock in government manufactured GDP owing to unhinged spending and deficits, which we most definitely do not, it would be wise to be careful about what you are applauding. The allegedly resilient US economy, which is purportedly defying the Fed’s interest raising campaign, isn’t nearly what it’s cracked up to be.
There was a hint of this in Walmart’s Q4 earnings announcement yesterday in which it noted a “choiceful consumer” was spending less per trip and curtailing outlays for discretionary items in favor of low-cost necessities. And that admission was more than evident in the steady deflation of its USA comp store sales trend.
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The figures in the chart are in nominal dollars, which declined by more than 50% between Q4 2023 (+8.3%) and Q4 2024 (+4.0%). Admittedly, inflation has been coming down too, as reflected in our trusty 16% trimmed mean CPI. The latter posted at +6.6% on a Y/Y basis in Q4 2023 and +3.8% in Q4 2024.
Still, the math says constant dollar sales have slipped even more than the reported nominal figures. The inflation-adjusted Y/Y gain in Q4 2023 was +1.7% compared to just +0.2% in the period just ended (Q4 2024).
Both figures are on the punk side, but there is “no way, no how” that the core main street consumer, who is a Walmart shopper by necessity, is in the pink of health as the stock peddlers of Wall Street and the “Joe Biden” puppeteers of the White House would have you believe.
Moreover, for want of doubt it should be noted that these marginal real sales gains were not due to the mighty Walmart loosing market share, either. The company reported that its surging eCommerce sales passed the $100 billion mark last year and that consequently Walmart “is gaining share in nearly every category”, according to CFO John Rainey.
So, the more appropriate question is not why the American consumer has been so resilient, but why the clearly fading consumer has remained in the game even this long.
Actually, however, there is no real mystery about the US economy’s defiance of the long-predicted recession. Nor is the purported stay of execution evidence that the geniuses at the Fed have orchestrated a “soft landing”.
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What is happening is that some of the massive amounts of government manufactured GDP which flowed from $6.5 trillion of stimmy spending during the 12 months after March 2020 got temporarily placed in cold storage at household bank accounts. And since then it has been slowly dribbling into the spending stream, thereby bolstering demand stemming from current period production and earnings.
We think a good measure of this delayed “stimmy effect” is captured by the relationship between high-powered consumer spending accounts—checkable deposits and currency—and national income. That ratio had varied between 4.0% and 6.5% during the two decades prior to Q1 2020 but took off like the literal rocket ship shape depicted in the chart below.
As of Q3 2019, these spendable cash balances totaled $938 billion and represented about 4.3% of GDP. But by the peak of the stimmy tsunami in Q3 2022 the figures stood at $4.8 trillion and 18.5% of GDP. In the graph this implicit $4 trillion surge in household cash balances looks like a big middle finger, and well it might be.
Households have told the Fed in so many words that interest rate increases or no, they are sitting pretty on an aberrational $4 trillion cash cushion. They apparently intend, therefore to keep on spending the usual 96% of what they are currently earning, thereby causing the Fed’s vaunted monetary brake to essentially fail.
Household Checkable Deposits and Currency as a % of GDP, 2000 to 2024
Needless to say, this vast lump of household cash didn’t happen owing to a sudden lurch into a high savings modality by American consumers or any other kind of financial immaculate conception. This stuff was figuratively dropped from Washington helicopters in the form of the three Covid relief bills enacted between March 2020 and March 2021, which collectively flooded $6.5 trillion into the US economy.
Moreover, most of that didn’t stem from honest deficit finance in the bond pits, which, in turn, would have curtailed (“crowded out”) investment spending by business on fixed assets or working capital. Instead, during this same period, the Fed printed roughly $5.2 trillion in new credits snatched from thin digital air, amounting to fully 80% of the Federal spending and borrowing bacchanalia.
In this context, the Commerce Department’s transfer payments numbers leave nothing to the imagination. As show in the graph below, prior to the pandemic the annualized rate of government transfer payment spending was about $3.1 trillion. It had been steadily creeping higher to that level during the previous years and by February 2020 amounted to a not inconsiderable 22.1% of personal consumption expenditures (PCE).
And then the stimmy flood swept through the US economy like a tsunami. By April 2020 after the CARES act hit the economy, the transfer payment rate had doubled to $6.3 trillion. After the third stimmy in the form of Biden’s American Rescue Act it surged further to the fantastic rate of $8.1 trillion by March 2021.
At this latter point the rate of stimmy fueled transfer payments amounted to a staggering 52% of the nation’s $15.7 trillion of PCE. In a word, Washington had descended into absolute lunacy.
This conclusion is especially warranted because most of the massive flow of stimmy money was additive to income based spending, not some kind of latter day Keynesian substitute for lost earnings. In fact, personal income less transfer payments (i.e. earned income) had posted at a $15.77 trillion annual rate in February 2020 and had risen—lockdowns and layoffs notwithstanding—to $16.35 trillion or by nearly 4% by March 2021.
In short, households got flooded with so much cash from the combination of normal production and income plus the flood of stimmies that they could not possibly spend it all. And that was even as they loaded up on merchandise goods from Amazon, while their normal venues of spending in the services sector (restaurants, bars, movies, gyms, malls etc,) were locked-down by government order.
Alas, the extra cash went into the above mentioned $4 trillion of cold storage, where it hangs like an economic sword of Damocles over the Fed’s desperate efforts to curtail the inflation Washington unleashed.
Annualized Rate of Government Transfer Payments, January 2019 to March 2021
Needless to say, that which is wholly artificial and wildly aberrant is not sustainable in the longer run. The $4 trillion pile of excess household cash, therefore, is slowly being worked down and by Q3 2023 was already $561 billion or 12% below its peak level of a year earlier.
Moreover, we are talking here not just about spending wherewithal that is being withdrawn from cold storage, but also about the consumer psychology that goes with it. In a word, it is likely that all this unusual cash in the bank has made consumers far less cautious than would normally be the case during a Fed tightening cycle, when debt service costs would be going up sharply and the fear of rising unemployment and loss of income would be in the air.
But as this cash pile steadily erodes, the psychological boost to consumers is likely to diminish steadily and likely in greater proportion than simply the reduction of dollar balances. Cash which is burning a proverbial hole in the pocket, will burn far less brightly as the pocket empties.
At the same time, the current aberrantly low savings rate is likely to be pushed higher as caution returns to the main street economy. In fact, the insanity of $6.5 trillion worth of stimmies flooding into the economy during March 2020 to March 2021 literally mangled normal economic flows and patterns.
Thus, in December 2019, the pre-pandemic savings rate (black line) was 6.4% and it represented $1.051 trillion of dollar savings at an annualized rate. But by April 2020, the sight unseen $2.3 trillion CARES act had literally shot out the lights in the macroecnomy.
The savings rate soared to a never before even approached rate of 32.9%, which amounted to a savings flow of just under $6.0 trillion at an annualized rate. And when the March 2021 stimmy hit, the same wild aberration once again ensued.
Needless to say, that’s where all the extraordinary cash in cold storage originated. The fools in Washington so mindlessly pumped spending stimulus into a semi-shutdown economy that it had no place to go except into the bank.
At some point not too far down the road, however, a great reversal is likely to happen. The ice cube of excess savings will melt as it comes out of cold storage, causing the household sector’s $4 trillion cash cushion to become depleted and the desire for cautionary balances to return to consumer finances. Accordingly, the rock bottom savings rate of 3.7% in December 2023 could readily return to the 6.4% average of 2017 to 20219.
In dollar terms that would take $500 billion out of the PCE stream, even as the spending supplements from household cash balances will have diminished sharply.
We’d like to believe this will happen by October 2024. The puppeteers managing “Joe Biden” deserve the economic comeuppance implicit in their silly boasting about the virtues of Bidenomics.
But even more to the point, the wanna be monetary politburo in the Eccles Building sooner or later will be deprived of its ballyhooed “soft landing”.
And the sooner, the better.
US Household Savings Rate And Savings Level, 2017 to 2023
Reprinted with permission from David Stockman’s Contra Corner.
