Resilient Consumers Ease U.S. Recession Worry

Corporate executives are touting the strength of U.S. consumers in the face of surging inflation, assuaging mounting fears of recession.

Bank CEOs kicked off earnings season with a consistent message that household finances and demand are in solid shape. Procter & Gamble Co.—which counts Tide, Bounty, and Pampers among its brands—has seen consumers reaching for premium-brand products. Bank of America Corp. and American Express Co. noted solid travel demand.

Tractor Supply Co. CEO Hal Lawton was more pointed on the retailer’s April 21 earnings call: “Any talk of recession at this point is premature.”

The state of American consumers, whose spending accounts for about two-thirds of the economy, has been up for debate in recent weeks, with some analysts expecting that decades-high inflation will sink demand, while others anticipate that consumer demand will remain robust.

“From our card-spend data, we have seen a strong recovery in travel, entertainment, and restaurant spending,” Bank of America CEO Brian Moynihan said last week.

Even after accounting for the effects of the $1.9 trillion American Rescue Plan stimulus in March of last year, Moynihan said, “we saw spending in the month of March 2022 on a comparable basis to 2021, 13 percent higher by dollar volume, and we saw a 7.4 percent increase in the number of transactions. So both dollar volumes and numbers of transactions rose nicely.”

Though wage gains broadly aren’t keeping pace with inflation, Americans’ average hourly earnings were up 5.6 percent in March from a year ago, the most since May 2020. Household balance sheets are healthy, bolstered especially by gains in real estate and the stock market. The household debt service ratio, which compares debt payments with disposable income, is well below the historical average.

Odds of a Recession

Doubts about the economy’s prospects are creeping in, however. The latest Bloomberg monthly survey, conducted in early April, showed that economists put a 27.5 percent chance of recession within the next year, up from 20 percent in March.

The fastest inflation since 1981, prospects for more aggressive policy from the Federal Reserve, still-tenuous supply chains, and Russia’s war in Ukraine have added to concerns about whether the U.S. economy can sustain the solid growth experienced over the past year and a half.

For their part, Fed policymakers are poised to raise their benchmark interest rate next week by a half point. The central bank’s task is a tricky one—tempering demand, and therefore inflation, while ensuring the economy doesn’t slip into a recession.

Although economic growth will slow this year, the “back half of 2023 and 2024 are when we could see really some of the effects of all the headwinds that are gathering really become too strong for the U.S. economy to weather,” said Sarah House, senior economist at Wells Fargo & Co. Come next year, the economy will be facing higher interest rates, slowing labor demand, and a greater distance from the massive fiscal support seen in the pandemic, she said.

For now, “consumers are still generally upbeat,” House said. “Nobody likes this inflation backdrop, but it’s not necessarily deterring a lot of consumers from spending, particularly when their job prospects are so good right now.”

Companies in industries ranging from technology to household goods to luxury retail have echoed that sentiment, noting that customers are still buying despite higher prices. L’Oreal SA CEO Nicolas Hieronimus said on April 19 that “the growth trend continued in the global beauty market” in the first quarter, “with consumer purchasing behavior unaffected by inflation.” Kimberly-Clark Corp. CEO Michael Hsu said on April 22 that the company’s price strategy is “very effective right now” and that volumes are trending better than the company initially expected.

Consumers Complaining but Still Spending

“Part of the inflation story is how the consumers handle it, and are we going to see consumption get cut off, or will consumers just push through the higher prices and continue to consume?” said Chris Gaffney, president of world markets at TIAA Bank. “So far, it looks like consumers are shrugging off the price increases, but everybody is complaining about it.”

Businesses may also benefit from an expected normalization of supply chains later this year, which will better position companies to meet demand. “While the current environment remains difficult to predict, I expect that as 2022 progresses, we will begin to experience an easing in supply-chain disruptions, general inventory rebuilding across many end-use markets, and still a healthy consumer willing to spend, especially in North America,” said Michael McGarry, CEO of paint maker PPG Industries Inc.

Overall, first-quarter earnings are beating estimates by 7 percent, with roughly 75 percent of S&P 500 firms topping projections, according to data compiled by Credit Suisse. Assuming the current beat rate, profits are on pace to grow 12 percent versus the same period last year.

“The forward guidance is trying to make sense of where we are, which is really hard to do right now, and where we’re headed, so they’re cautious about forward guidance,” Gaffney of TIAA said. “But at the same time, this economy is rolling along, we’re still expanding, so company earnings are coming in fairly well.”

–With assistance from Molly Smith and Daniela Sirtori-Cortina.

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