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November 11, 2022

Economic Perspectives

Steve Scranton

SVP, Chief Investment Officer and Economist


  • You are receiving this a day early because the bank is closed on Friday for the Veterans Day holiday.
  • There will be no Economic Perspectives for the next two weeks due to a combination of business travel and vacation from my side. The next Economic Perspectives will be on December 2nd.


In past editions of Economic Perspectives, I have expressed several beliefs about the Federal Reserve’s decision to make aggressive interest rate increases to bring inflation under control:

  • Rising interest rates do not result in lower inflation rates.
  • Rising interest rates lead to recessions.
  • Recessions result in lower inflation rates.
  • The Federal Reserve will continue to raise rates until something breaks. Usually, it is the economy.

If the Federal Reserve’s actions are going to cause a recession, one area that we should monitor closely for early warning signs is the consumer. Since the consumer has been the engine of growth for the economy, problems with the consumer should be a leading indicator for warning that the leading edge of the recession storm may be arriving.

What factors can we monitor for signs of consumer experiencing financial stress/distress?

  • Wages after inflation
    • If wages are keeping pace with or exceeding the inflation rate, then the consumer would not feel financial stress/distress from this factor. When wage growth is less than expense growth, this can cause financial stress/distress.
  • Spending
    • If consumers are reducing their spending this would be a potential sign of financial stress/distress.
  • Use of savings
    • If consumers’ paychecks are not sufficient to cover expenses, drawing down savings is a form of “bridge” financing. By that I mean consumers tap their savings to bridge the gap between wages and expenses. The sign of stress/distress is when the savings have been depleted.
  • Use of credit cards
    • If the consumer has used up their savings or is unwilling to draw it down past a certain level, they may turn to credit cards as another source of bridge financing. The consumer may be able to make the minimum monthly payment on a credit card if they cannot fully pay for an expense. The sign of financial stress/distress is either when they max out their credit card balance or the minimum monthly payment grows.
  • Delinquency rates for consumer debt
    • Historically, a clear sign of financial stress/distress is when the delinquency rate starts to rise on the debt that the consumer has incurred.


  • Wages After Inflation (Bureau of Labor Statistics) — signs of financial stress and possible distress
    • This is called real average weekly earnings. Year-over-year real average weekly earnings have been negative for 20 consecutive months (since 4/30/21). This ties directly to when the Consumer Price Index (CPI) started to accelerate. Year-over-year CPI jumped to 4.2% as of 4/30/21. Consumers are being forced to either cut back spending or access other sources to bridge the gap. Consumers in the lower paying jobs are most likely experiencing financial distress after 20 consecutive months of negative wage growth. Other income levels may be experiencing varying degrees of financial stress.
  • Real Personal Consumption Expenditures (Bureau of Economic Analysis) — signs of financial stress
    • Year-over-year real personal spending has steadily declined once real average weekly earnings went negative.
    • Year-over-year real personal spending peaked as of 4/30/21 at 25.5% (thanks to stimulus funds) and now stands at 1.90% as of 9/30/22.
  • Use of Savings (Bureau of Economic Analysis) — signs of financial stressThe personal saving rate stood at 26.3% as of 3/31/21 thanks to the last round of fiscal stimulus checks.
    • The personal saving rate has also steadily declined since real average weekly earnings went negative.
    • To me, this shows evidence that the negative wage rate is causing financial stress for consumers and forcing them to draw down their savings. As discussed in previous editions of Economic Perspectives, the sad reality is that the “have to buy” goods and services (i.e., their core expenses) have seen some of the biggest increases. Since the consumer has to buy these items, they are being forced to tap their savings. The fact that the savings rate is down to 3.1% indicates signs of financial stress. If it continues to be drawn down, that would be an indicator for me that the financial stress is progressing to distress.
  • Use of credit cards (FDIC) — signs of financial stressSince 3/31/21 credit card balances have steadily grown.
    • The year-over-year change in credit card balances has risen from a negative 12.8% growth rate to a positive 14.1% growth rate. Actual balances have risen $142 billion.
    • This is a rising trend, and the growth rate is above levels that existed in 3 of the last 4 periods just before a recession started. The outstanding balances are $41 billion below the record high.
  • Since 3/31/21 the percent of people making minimum payments on their credit card balances has risen from 7.35% to 8.11%.
    • Again, this is clearly a rising trend but not at record highs. Before the pandemic crisis (3/31/20) the percent stood at 9.57%. Unfortunately, the Federal Reserve only started tracking this data in 2012 so we do not have a comparison for where it was before previous recessions.
  • Delinquency rate for consumer debt (Federal Reserve) — no major financial stress or distress
    • The delinquency rate on credit cards has risen over the past three quarters from 1.56% to 1.81%. Although this is a short-term rising trend, the delinquency rate is not showing signs of consumer financial stress as it is below the rate that existed at the end of 2019. The delinquency rate was 2.66% at that time. Prior to the start of the 2007-2009 recession, the delinquency rate was 4.41%.
    • The delinquency rate for all consumer debt is 1.71%. Once again, there has been a trend in the rate as the rate has been rising for four consecutive quarters, but the rate is still below the 2.49% rate that existed at the end of 2019. The delinquency rate on all consumer debt was 3.22% before the 2007-2009 recession started.
  • There is also an index designed to indirectly measure consumer financial stress. For the older generation that lived through the 1970s and 1980s you may remember the Misery Index. The Misery Index is the sum of year-over-year CPI plus the unemployment rate. It was created in the 1960s by economist Arthur Okuh. The index has no predictive power as a leading index for a recession, but it gives us another indicator of consumer financial stress.
    • 1972-1973 recession: 11.71 and rising. Peak: 19.85
    • 1980 recession:19.25 and rising. Peak: 21.87
    • 1981-1982 recession: 16.78 and falling
    • 1990-1991 recession: 60 and falling
    • 2001 recession: 7.73 and rising. Peak: 9.74
    • 2007-2009 recession: 9.07 and rising. Peak: 12.58
    • 2020 recession: 5.82 and stable
    • Current level: 11.72 and starting to decline


  • There are signs of financial stress developing for consumers, but there are not clear signs of the stress evolving into distress yet.
    • I will caution once again: aggregate data does not reflect what is happening to everyone.
    • Lower income wage earners are more likely to be in financial distress as higher prices have a disproportionate impact on them while higher income wage earners may not be feeling financial stress.
    • The same is true for those who fund their spending via debt versus those who save before buying. Rising interest rates on the outstanding debt is negatively impacting people with variable debt while it is benefiting those with savings and their interest income is now rising.
  • The point where the consumer reaches the breaking point and is forced to cut back more dramatically on spending is the point where a recession is most likely to begin.
    • Lower income wage earners are most likely experiencing the leading edge of the recession storm right now.
  • Consumers appear to still have enough resources to support their spending for the rest of this year. It may not be as strong of a holiday spending season as before, but the data also does not indicate that the holiday spending season — in aggregate — has been canceled.
  • The risk that we need to understand is the consumer does not have the same ability to continue borrowing to fund their spending as the government and Corporate America. As a result, once the consumer exhausts the resources that they have been using to bridge the gap between expenses and income, the cutback in spending may occur fairly rapidly. That is when the recession will start.
  • Even though I am trying to provide you with information to help you understand the dynamics of what causes a recession and what signs to look for that the recession is coming, I must emphasize again, for the US as a whole, I do not believe we are in a recession at this time.
  • The purpose of these articles is to help you prepare for a coming recession, not to depress you. I will repeat what I have said before: we never know exactly when a recession will hit, so now is the time to prepare so that you are able to look for opportunities when a recession hits.
  • My best suggestion is to continue to remain focused on your business and your customers and not on the blaring 24/7 media headlines. You may scoff at me but I continue to say the best way to prepare for a recession is to turn off your TV and focus on what makes you a success.
  • I will also advocate that this is also the time to prepare to help those in need. For some that time is now; for others that time will be when the recession arrives. Whether it is donating to organizations that exist to help people in need or helping directly is up to each of us to decide. 


Economic Data

It was a light week for economic data, inflation being the data point that everyone was waiting for. 


  • The Department of Labor reported a 7,000 increase in initial jobless claims. Total initial jobless claims are 225,000. Continuing claims rose by 6,000. Total continuing claims are now 1,493,000.


  • The Mortgage Bankers Association reported a continued decline in mortgage applications last week. Mortgage applications fell 0.1% after falling 0.4% the week before.


  • The Bureau of Labor Statistics (BLS) reported a 0.4% rise in the Consumer Price Index (CPI) in October. This matched the 0.4% increase in September and was below the median forecast for a 0.6% increase. The CPI rose 7.7% on a year-over-year basis. This was lower than the 8.2% increase in September and also below the median forecast for a 6.5% increase. The three core expenses for the average consumer continue to cause pain as Shelter prices were up 6.7%, Gas prices were up 17.5% and Food prices were up 10.9%.
  • The BLS also reported the 20th consecutive month of expenses outstripping the average worker’s wage. Real average hourly earnings fell 2.8% after falling 3.0% in September. Real Average Weekly Earnings fell 3.7% after falling 3.8% in September.


  • The Census Bureau reported a 0.6% rise in wholesale inventories in September after a 0.8% increase in August. This was potentially an involuntary increase in inventory since sales only rose 0.4%. It could also be a voluntary increase to begin preparing for the holiday season. Either way, an increase in inventory adds to GDP growth. 

As we head toward the Veterans Day holiday there is a poem written by John McCrae that honors those who fell during battle.  In honor of those who gave their lives to ensure our freedom, I am providing that poem to close this edition of Economic Perspectives.


In Flanders fields the poppies blow

Between the crosses, row on row,

That mark our place; and in the sky

The larks, still bravely singing, fly

Scarce heard amid the guns below.


We are the Dead. Short days ago

We lived, felt dawn, saw sunset glow,

Loved and were loved, and now we lie,

In Flanders fields.


Take up our quarrel with the foe:

To you from failing hands we throw

The torch; be yours to hold it high.

If ye break faith with us who die

We shall not sleep, though poppies grow

In Flanders fields.


Patrick Dawson


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