With both savings declining and income growth slowing, the American economy is in for some harsh reality heading into 2023.
That was the takeaway of current economic data by Tim Quinlan, managing director and senior economist for Wells Fargo Securities, as he spoke at the 2022 Driftwood Capital Investor Conference.
"Prices are growing faster than our paychecks are," he said.
Quinlan said the Federal Reserve's efforts to cool inflation were necessary, but essentially "broke the economy," meaning a recession is unavoidable. He said he presumed the situation actually would be worse than economic data has shown so far.
"Our forecast has a recession penciled in," he said. "I think as recessions go, it's a small 'r' recession or a relatively mild recession, but a recession nonetheless."
Quinlan said current consumer trends simply cannot last.
"Somehow there's this uncanny staying power where consumers are increasing their spending even if their income is falling. ... This is kind of by definition an unsustainable trajectory," he said.
He said many industries, including hotels and hospitality, pointed to a shift in spending during the pandemic from goods to services as a positive long-term trend, but that pivot was relatively short-lived.
"Consumers are still spending like no tomorrow on goods," he said.
Another troubling trend is a significant increase in debt among U.S. consumers, he said, noting that "consumers in general are on borrowed time."
The personal savings rate is at its lowest point since 2005 as borrowing increases, he added.
"The two largest monthly increases in credit card borrowing have occurred in the last three months," Quinlan said.
He said that bill will come due sooner rather than later.
"This devil-may-care approach might be applauded to the extent that it continues this expansion, but my worry is that when a downturn eventually comes, it may bring with it a sharper downturn because of the debts on households' balance sheets going into it," he said.
Quinlan said the data on how quickly household savings are depleting suggests that at the current rate the spending spree "will last less than 12 months, and my bet is that it won't last even that long."
He had previously projected an even greater pinch for the U.S. economy during the fourth quarter of 2022, he said.
"I guess the lesson here is to never bet against the U.S. consumer as long as they still have a credit card," he said.
Quinlan said he now expects that retrenchment to hit squarely by the middle of 2023, and that could contribute to finally lowering prices, but not to the extent that the Fed will begin lowering interest rates.
He said it's important to put the Fed's interest rate hikes in historic context, noting rates increased more quickly in 2022 than any time in the past 40 years. Inflation also grew at its fastest rate "since before Cheers was on TV on Thursday nights in 1982," he said.
"The tightening we've already had is as pronounced as any tightening cycle we've had in the last 40 years" with more increases on the way, he said.
One of the few reasons hoteliers might welcome a recession would be some loosening of the labor market, but Quinlan said he expects the labor market will remain tight even in an economic downturn, as Wells Fargo projects unemployment rates under 6%.