SF Fed published their study last Friday showing consumer excess savings have run out. This saving was the cushion that allowed consumers to continue spending in 2022, even when inflation was outpacing their wage growth up until a year ago. To continue spending, consumers chose to save less and deplete their excess savings, shown by the personal savings rate below.
https://fred.stlouisfed.org/series/PSAVERT
Now that the excess savings is gone, to continue spending, consumers will have to rely on further wage growth, credit card debt, or selling stocks/real estate.
"the depletion of these excess savings is unlikely to result in American households sharply cutting their spending levels as long as they are able to support their consumption habits through continuous employment or wage gains, other forms of wealth—including non-pandemic-related savings—and higher debt."
Consumer spending is 70% of the US GDP, and it's likely to slow imminently. While this doesn't guarantee recession is around the corner, slower spending will lead to lower corporate sales, which might lead to layoffs to protect corporate margins, which lead to further less consumer spending.
Therefore, the next 6-12 months will likely be a critical time for the US economy. The Fed will need to be nimble and ready to cut in response to a weakening economy, or they risk waiting too long and toppling the economy into a recession.
Even if the economy seems strong now, nonfarm payroll can go from 250k to -100k in 2 months (2001), and the quarter before the 2008 recession had initial real GDP of almost 5%. (not saying 2008 will happen, but just saying don't be fooled by the strong economy because it tips over quick).
