Larry Summers says lower spending could trigger a recession

Former Treasury Secretary Larry Summers. AFP via NICHOLAS KAMM/Getty Images

When recession warnings raged last year, the only thing that reassured people like Bank of America CEO Brian Moynihan was that Americans were still spending money. It was that there was. High U.S. consumer spending has helped prevent a deep recession, thanks to his $2.5 trillion in excess savings amassed during the pandemic, but that buffer is rapidly depleting, causing the economy to stagnate. may be on the verge of a recession because of it.

There is no guarantee that consumer spending will remain strong, given the risk of further inflation. Also, if Americans refrained from purchasing, the economy would change significantly. That moment may be closer than you think, according to economist and former Treasury Secretary Larry Summers.

“My guess is that the overhang, or the savings that consumers have accumulated, will take another few months, but another month to implement,” Summers said in an interview with CNN’s Poppy Harlow on Monday. There is no age,” he said.

Summers said the economy may be approaching a “Wileigh Coyote moment.” looney toons The character, who tends to chase the elusive Road Runner off the edge of a cliff, eventually realizes his mistake and begins to fall.

Summers said the same thing could be happening to the U.S. economy. You may be running off the edge of a cliff, and when your spending dries up, nothing will stop you from sinking to the bottom.

“I use the term ‘wiley coyote moment risk’ to refer to the fact that the economy could enter an air pocket in a matter of months,” he said.

economic buffer

Summers has been pessimistic for months about the U.S. economy’s chances of avoiding a recession. Even when eminent economists, including Nobel laureate Paul Krugman, pointed to positive inflation data as a reason to believe a soft landing was possible, if unlikely, Summers still believed that a recession was ” It’s more likely than possible,” he warned.

Economists had good reason to be optimistic about the final months of 2022, and soaring consumer spending was a big part of it. Spending has remained stable for months despite rising inflation. Households purchased large sums of goods early in the pandemic, but have saved even more due to lockdowns due to distance restrictions. Spending has reached new highs in recent months, with him up 1.8% in January, according to the Commerce Department. It’s helped by the fact that Americans are finally spending money on services again, most people who want jobs have jobs, and wages are rising.

But that doesn’t mean spending will stay strong forever. Their pandemic savings, a major source of Americans’ overspending, may have begun to dry up months ago.

According to Northwestern Mutual, the percentage of after-tax income Americans put in savings accounts has fallen from 8.4% in December 2021 to 6.2% in March 2022. In December, the personal savings rate for Americans fell to near a record low.

Moody’s Analytics chief economist Mark Zandy predicted in July that low-income US savings could begin to run out within six months.That timeline has passed and many Americans may have already used up most of their savings, according to Bankrate senior industry analyst Ted Rothman. luck last month.

Consumer spending accounts for about 70% of US GDP, leaving a thin buffer for Americans to avoid slowing economic growth and recession. But consumer spending could dry up at the worst possible time, as inflation has turned out to be slower to come down than some economists predicted just a few months ago.

“Poppy, I don’t think there’s any question that inflation is still on a safe glide path near the 2% level anyway,” Summers told CNN.. He said that until the Federal Reserve is convinced that inflation is on a steady path to normalization, interest rates will continue to rise, making borrowing more expensive and potentially more expensive than consumers will spend. He added that it would encourage them to save.

“As has almost always been the case, the process of lowering inflation will at some point lead to a recession,” Summers said. “Between the risk of inflation and the risk of some sort of air pocket, the Fed is trying to walk along a very narrow ledge, and it’s not a very easy situation.”