David Lebovitz:

Hello, my name is David Lebovitz, and I'm a Global Market Strategist at J.P. Morgan Asset Management. Welcome to On the Minds of Investors. This week, I would like to talk a little bit about the health of the US consumer. Coming into 2022, investors expected that a healthy consumer, supported by significant fiscal stimulus during the pandemic, would power the economy at an above-trend pace. While this was indeed the case at the start of this year, a series of idiosyncratic factors pushed aggregate growth into negative territory.

As we look ahead to the end of the year and the beginning of 2023, this excess savings thesis is beginning to weaken as consumer financial health has deteriorated meaningfully from the start of the year. To start, the personal savings rate has fallen from a level of eight and a half percent at the end of 2021, to a level of 5% today. And revolving credit use has steadily increased. Data from our colleagues at Chase provides us with additional granularity.

By analyzing July data on credit card revolving balances and utilization rates, we see an increase in revolving utilization, calculated as average end of cycle revolving balance divided by the credit limit, alongside reducing bank balances at or below pre-COVID levels for middle-income consumers. Relative to lower-income groups, middle-income consumers are also experiencing lower wage growth and benefited less from government stimulus. They also exhibit lower excess savings relative to higher-income bands. The bottom line, the consumer is softening, but not stalling.

US recession risks have risen meaningfully since the start of the year, but recession is not yet a foregone conclusion. However, macroeconomic volatility is clearly set to remain higher than its pre-pandemic level, which will translate into continued volatility across interest rates, currencies, and equities. Further complicating the macroeconomic picture is an energy situation in Europe that looks set to require a meaningful fiscal response, and a US market which will contribute to the stickiness of core inflation in 2023. As we look ahead, a diversified approach to investing seems more likely to be friend than foe.