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Below is a transcript of this week’s video:

The recession around the COVID-19 pandemic was unique for a lot of reasons, particularly since it was a relatively good one for the average American consumer. Federal and state governments issued unprecedented peacetime levels of stimulus in the form of various transfer payments like stimulus checks, enhanced unemployment benefits and various other programs that put cash in the pockets of Americans. On the cost side of household budgets, interest payments dipped considerably as student loan forbearance kicked in and all-time low mortgage rates led many to refinance. On top of that, wage gains have been well above pre-pandemic averages, especially for the bottom half of wage earners which experienced multi-decade highs in wage earnings.

The total effect of all these crosscurrents has been a robust consumer in the U.S. Higher income and lower expenses led to a steeply increasing savings rate among households, as they socked away more cash than ever before for future consumption. What’s more, is that debt service ratios had never been lower, which measures how large all debt costs from mortgage, auto, credit cards and other personal loans are relative to disposable income. One could argue that the U.S. consumer came out of this recession in one of the strongest positions in history.

However, it seems those tailwinds were not destined to last forever. That pile of excess savings above and beyond what households likely would have saved given pre-pandemic trends peaked around mid-2021 and have likely been supporting healthy consumer spending ever since. However, there are signs that its stimulative impact may be fading. For example, U.S. earners in the bottom quartile, which tend to be more likely to spend any incremental dollars earned, are projected to exhaust their extra savings this quarter in aggregate. All else equal, this may be a headwind to consumer spending, which represents roughly two-thirds of all economic activity in the U.S.

Households have also been grappling with an erosion to their real purchasing power due to higher-than-normal inflation. While nominal disposable income in the U.S. has been generally rising over the last few years, it’s also been accompanied by multi-decade highs in inflation. After adjusting for inflation over time, real disposable income has actually been roughly flat over this period. This suggests that while consumers have been spending more, this may be misleading since they may not necessarily be getting more for it.

Also, the labor market is showing some early signs of weakness. Traditional measures like the unemployment rate and nonfarm payrolls have historically been less than timely in sending signals on the health of the jobs market. However, the number of WARN notices issued nationwide, which refers to the federal requirement for most employers with 100 or more employees to disclose their plans for layoffs at least 60 days in advance, has ratcheted higher. Historically, this has been highly correlated with initial jobless claims, suggesting that there may be further upside to claims over the next few months.

On top of that, there are some early signs of stress showing up in consumer lending. The shares of loan balances for auto, credit card and mortgage debt that have transitioned to delinquency after 30 or more days of nonpayment has been creeping higher, which is consistent with past periods of recession in the U.S. Altogether, while the consumer has been in a solid position for the past several years, investors should be careful not to take such strength as a given, particularly as several warning signs are starting to pop up. Such weakness may be a catalyst for recession as the year continues to unfold.

To summarize, consumers on the lower end of the income spectrum benefitted from excess cash savings, lower debt costs and robust wage growth. Those excess savings have kept household spending elevated for some time, but the bottom quartile of earners have largely depleted those cash reserves. Additional headwinds from inflation have also zapped their real purchasing power and the labor and consumer credit markets may be the next to turn. If the consumer, which is a pillar of the U.S. economy, starts to falter, that could be a factor that leads to recession at some point later this year.