Households’ Extraordinary Cash Holdings Will Thwart Fed Tightening, Part Deux
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Part un was written by me way back on March 14, 2020. I should have paid more attention to my 2020 commentary so that I would not have thought that household spending would be less resilient as it has been so far in 2023. Moreover, I would not have called for a recession to commence in Q2:2023.
In Chart 1 below are plotted monthly observations of the M2 money supply as a percent of nominal Disposable Personal Income (DPI). From January 2015 through December 2019, the median value of this ratio was 91.8%. Then, after the federal government started writing Covid-aid checks to households and businesses, checks financed by the Fed and banking system, the ratio of M2 to DPI reached a high of 118.9% in January 2022. As of September 2023, the ratio had declined to 102.1%, much below its January 2022 high, but also materially above its 2015-2019 median value.
Chart 1
So, households as of this past September remained abnormally liquid. (M2 overstates households’ ownership of currency and transactions bank deposits because the M1 component of M2 includes holdings of businesses.) Nevertheless, there is some evidence that households are purchasing a smaller percentage of nominal durable goods as a percent of total nominal retail sales. Plotted in Chart 2 are monthly observations of nominal retail sales of durable goods (motor vehicles and parts, furniture, home furnishings, appliances and electronics) as a percent of total retail sales. The 2019 median value of this percentage was 23.4. The median value so far in 2023 is 21.9% and the October 2023 value was 21.6%. It would appear, then, households are using a relatively larger part of their liquidity to purchase necessities such as food and clothing.
Chart 2
In sum, households continue to be relatively liquid, which may sustain their spending for a quarter or two. So, I have revived my guesstimate as to when the recession will commence out to Q2:2024, from my previous start date of Q2:2023. So, if, in fact, a recession starts in Q2:2024, I was only off by one year. That’s an improvement over my July 30, 2004 call in my commentary entitled “Collateral Damage from a U.S. Housing Bust”. In that commentary, I predicted that when the housing bubble inevitably burst, it would take down the U.S. banking system. I was only off by about four years!
Paul L. Kasriel
AuthorMore in Author Profile »Mr. Kasriel is founder of Econtrarian, LLC, an economic-analysis consulting firm. Paul’s economic commentaries can be read on his blog, The Econtrarian. After 25 years of employment at The Northern Trust Company of Chicago, Paul retired from the chief economist position at the end of April 2012. Prior to joining The Northern Trust Company in August 1986, Paul was on the official staff of the Federal Reserve Bank of Chicago in the economic research department. Paul is a recipient of the annual Lawrence R. Klein award for the most accurate economic forecast over a four-year period among the approximately 50 participants in the Blue Chip Economic Indicators forecast survey. In January 2009, both The Wall Street Journal and Forbes cited Paul as one of the few economists who identified early on the formation of the housing bubble and the economic and financial market havoc that would ensue after the bubble inevitably burst. Under Paul’s leadership, The Northern Trust’s economic website was ranked in the top ten “most interesting” by The Wall Street Journal. Paul is the co-author of a book entitled Seven Indicators That Move Markets (McGraw-Hill, 2002). Paul resides on the beautiful peninsula of Door County, Wisconsin where he sails his salty 1967 Pearson Commander 26, sings in a community choir and struggles to learn how to play the bass guitar (actually the bass ukulele). Paul can be contacted by email at econtrarian@gmail.com or by telephone at 1-920-559-0375.
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