President Joe Biden. Photo courtesy of whitehouse.gov
The US economy contracted by 0.9% in the second quarter of 2022 https://www.bea.gov/data/gdp/gross-domestic-product. This follows a 1.6% contraction in the first quarter of 2022. Consecutive quarterly declines in gross domestic product (GDP) meet the definition of what many people consider a recession. I argue that the economy is in recession. However, the official referees have not yet defined the crisis as such. The argument against my assertion is that the negative GDP imprints were caused by inventory reduction. For example, changes in inventories subtracted two percentage points from second quarter GDP.
paycheck to paycheck
As of June 2022, 61% of Americans are living paycheck to paycheck, according to the Lending Club https://www.pymnts.com/consumer-finance/2022/report-36-of-consumers-earning-250k-now-live-paycheck-to-paycheck/. The silver lining to this gray cloud is that many of these people live this way by choice. I hope you grabbed your pearls and gasped when I said that because the idea of someone choosing to live paycheck to paycheck is disgusting. This is not what I mean. Many (certainly not all) of these people buy too many avocados and soy lattes (**slow hand raises**), live in too many houses (or too many houses), go on too many vacations, or engage in financial relationships”. products.” In other words, they spend their extra money or invest it in real estate, stocks and bonds.
Silver linings aside, I’m afraid it will get worse. Among all U.S. consumers, average savings fell from $11,274 in May 2022 to $10,757 in June, according to Lending Club. It’s still high, but a monthly decline of 4.6% is concerning. That may not seem like a lot until you annualize it to 55%. This reduction in savings is not sustainable.
US household balance sheets are in much better shape than they have been in the past. They are estimated to hold $2.5 trillion in excess savings https://www.brookings.edu/research/bolstered-balance-sheets-assessing-household-finances-since-2019/. However, inflation is high enough and job creation is slowing enough that this extra cushion could disappear in about 15 months (this is a literal calculation on my part). It seems long. But do you think consumers wait until they are completely out of money before they stop spending? Or do you think they will see the savings dwindle and, in response, they will reduce their spending? If they reduce their spending, it prolongs the recession.
The Inflation Reduction Act
As a general rule, I do not comment on pending legislation, as it is often rewritten or deleted before being enacted. However, Congress will likely pass the so-called Inflation Reduction Act of 2022. I’ll spare you all the details, but I don’t see any material inflation relief in the act.
Here is the essential of the legislation. It is seen as a slimmed down version of the Biden administration’s Build Back Better program that was proposed but not passed last year. It taxes large corporations and wealthy individuals to raise $750 billion over the next decade. Some $450 billion will help fight climate change and pay lower health insurance premiums for Americans on the Affordable Care Act. The remaining $300 billion will reduce federal government budget deficits.
I am cynical about the ability of this law to reduce inflation. However, overall, I’m not crazy about it. I mean, it’s hard to get upset about cleaning up the environment and helping people get much-needed health care. If the government takes my money anyway, please dedicate some of it to these purposes. However, it is misleading to present it as an inflation tool.
One of the issues about the Inflation Reduction Act’s ability to reduce inflation is who is being taxed. About $313 billion of the $750 billion raised would come from a new minimum tax of 15% on “book income” (corporations report publicly to investors, but not necessarily to the IRS). I’m not mad at that either; these loopholes should have been closed long ago. However, CNBC reports that half of these taxes will be borne by manufacturers. Much of today’s inflation has been caused by the inability of businesses to manufacture more goods. Imposing restrictions on these businesses, financial or otherwise, is a problem for inflation, not a cure.
The law is not expected to affect inflation until the middle of this decade. By 2031, the law is expected to reduce the consumer price index (CPI) by 0.33%. Not 3.3%, but 0.33%. That’s the equivalent of lowering the price of a $5 gallon of gasoline by 1.7 cents. The most immediate way the Inflation Reduction Act reduces inflation is by slowing economic growth.
I guess what you call the bill makes no economic difference. Yet he reveals that the White House has no plan to fight inflation. Investors need to be better prepared for the fact that the Federal Reserve is the only group really fighting inflation right now. This will keep pressure on the US economy as they cannot fix issues like supply chain issues. Net-net, all of this makes me less optimistic and more concerned that there could be more economic and stock market difficulties in the months ahead.
Allen Harris is the owner of Berkshire Money Management in Dalton, Mass., managing over $700 million in investments. Unless specifically identified as original research or data collection, some or all of the data cited is attributable to third-party sources. Unless otherwise stated, any mention of specific securities or investments is for illustrative purposes only. The adviser’s clients may or may not hold the securities in question in their portfolios. The Advisor makes no representation that any of the securities mentioned have been or will be profitable. Full disclosures: https://berkshiremm.com/capital-ideas-disclosures/ Address inquiries to Allen at AHarris@BerkshireMM.com.