Economic Watch: 2023 Off to a Good Start, But Watch for Credit Card Debts – 23rd February 2023

The economic outlook for the US seems to be heading in the right direction. However, there’s still plenty of uncertainty as higher interest rates slowly reduce demand – which could include your print shop’s bottom line.

On the Up and Up

Let’s look at the good news first. Unemployment remains at all-time lows so far, with the unemployment rate currently at a cool 3.4 percent – the lowest it’s been in 53 years. Initial claims for state unemployment benefits went down by a thousand to 194,000 (seasonally adjusted) for the week ending February 11th.

Despite the news of layoffs in the tech sector and several other industries, unemployment claims remained at pre-pandemic lows. Even if tech companies laid off 10 percent of their workforce, it would hardly make a dent in the country’s overall unemployment figures. If anything, those who were laid off have either found new jobs or not made any claims owing to their severance packages, which could account for the lower figures.

Nonfarm payrolls jumped from 260,000 in December 2022 to 517,000 in January 2023, beating market forecasts of a decrease to just 185,000. This comes after a four-month trend of slowing job gains as the leisure and hospitality, professional and business services, and healthcare sectors sought out new hires. As most of these services were significantly impacted by the Covid-19 pandemic, they’re now better positioned to fill vacant roles and stabilize their fluctuating workforce.

Sourced from Trading Economics

Sourced from Piper Sandler

Meanwhile, retail sales surged 3 percent last month (2.6 percent after adjusting for last month’s goods deflation), up from a 1.1 percent drop in December last year. This exceeded expectations of a rise of 1.8 to 1.9 percent, as was forecasted, while retail sales year-on-year were high at 6.4 percent in January. While the underlying consumption trend is better than December’s, it’s still not as strong as the numbers tell it. Most sales were derived from department stores (17.5 percent), food services and drinking places (7.2 percent), as well as motor vehicles and parts (5.9 percent). Clothing sales increased by 2.5 percent: a modest sum.

All of this help to paint a positive picture of the state of the US economy, despite future uncertainties. However, even as the US economy grew at an annualized 3.2 percent (on quarter) in 2022’s third quarter, it might be a little too early to predict where the economy is headed next. Rising prices continue to be a major concern as more Americans find themselves with less in their savings and more going out of their pocket for various necessities and luxuries. That could mean fewer orders for customized garments.

Sourced from WSJ

Higher Debt, Lower Savings

In the third quarter of 2022, the savings rate of Americans hit an all-time low of 3.3 percent – contrast this to when it hit 33.8 percent in April 2020 when the first Covid-19 restrictions began. It’s the lowest since the Great Recession from 2007 to 2009, down from 3.4 percent the previous quarter. As interest rates continue to soar, people are forced to take on more debt.

Sourced from Yahoo! Finance

This has inevitably caused a sharp increase in credit card debt: credit card balances rose 15 percent in the third quarter of 2022, thus far the highest year-over-year increase in over 20 years. That’s $986 billion; in contrast, pre-pandemic credit card debt was $927 billion. On that note, credit card delinquencies spiked to 5.32 percent from 5.16 percent in the previous quarter; younger Americans currently account for the highest credit card delinquency rate at 9.36 percent.

At the same time, the total household debt rose 2.4 percent to $16.9 trillion in the fourth quarter of 2022, three-quarters of which accounts for housing debt. All this has only exacerbated the severity of Americans’ financial positions. “Although historically low unemployment has kept consumer’s financial footing generally strong,” said Wilbert van der Klaauw, economic research adviser at the New York Fed, “stubbornly high prices and climbing interest rates may be testing some borrowers’ ability to repay their debts.”

What Comes Next?

This starkly contrasts with when Americans helped prevent the economy from going into a slump when Covid-19 restrictions were still in place. Fueled by government stimulus payments and fewer expenses due to the pandemic, Americans could save more and make smarter (and more affordable) purchases and repayments for their credit cards and loans. When the pandemic restrictions subsided, Americans took the opportunity to make full use of their savings.

Sourced from Surveys of Consumers, University of Michigan

Still, with easing inflation and a robust labor market, consumers are cautiously optimistic about the state of the economy. This was noted in the University of Michigan’s survey on consumer sentiment, with an increase in the consumer sentiment index for February to 66.4, up from January’s 64.9. Conversely, the consumer expectation index – which looks at consumer sentiment on the state of the economy in a year’s and five years’ time – dropped to 62.3 from 62.7 in January.

In other words, consumers know that economic conditions could swing either way at any time. They have a more pessimistic view of the overall economy and job market conditions but are nonetheless hopeful that incomes will increase. Inflation will still take a while to slow down; as the producer price index (PPI) increased 0.7 percent (seasonally adjusted) month-on-month in January 2023, prices will remain high for the foreseeable future. The gains seen at the start of the year might be on the downtrend as consumer spending slowly loses momentum and delinquencies rise.

Some segments of American society may remain hopeful that things will improve and are willing to take on debt to spend on various wants and needs. With unemployment at an all-time low, those in the low-income brackets may be able to find better job prospects and be able to repay their existing debts. But as the Fed is still aiming to increase interest rates in its efforts to curb further inflation, the effect could lead to weaker demand for new hires and a modest increase in unemployment towards the end of the year. In return, it’s hoped that this will reduce the pressure of higher wages and price increases, especially in the service sector.

We rate the economy’s resilience at seven thanks to the robust job market, low unemployment rate, and relatively high consumer spending. In fact, the last point is why we rate overall sales at eight. You’d do well to make good use of the opportunities afforded at this time: consider attracting new customers with, say, introductory promotion rates for them. Meanwhile, with interest rates also rising, taking up a loan for new equipment or a new shop location may be risky, so we’d advise you to consider your options carefully beforehand.