Consumers fended off a recession — but keep spending like there's no tomorrow

• Defiant consumer spending has helped the US economy dodge a recession.
• Yet consumers are saving less, raiding their piggy banks, and racking up record credit-card debt.
• Experts say their spending will inevitably falter, tanking the economy.

American consumers have staved off a recession by relentlessly spending despite soaring inflation, surging interest rates, multi-industry turmoil, and wider economic jitters.

Yet several experts have warned they can't resist those pressures forever. Here's a closer look at the economy's saviors and why they may be nearing the point of capitulation.

Defying the doomsayers

Consumer spending is the lifeblood of the economy, accounting for about 70% of US GDP.

Households have been squeezed hard in recent years, with headline inflation spiking as high as 9.1% as the cost of food, fuel, housing, and other essentials soared.

The Federal Reserve reacted by hiking its benchmark interest rate from almost zero to more than 5% between early 2022 and mid-2023. That raised many people's monthly payments on their car loans, credit cards, mortgages, and other debts.

Leading investors, economists, and business leaders have been predicting for years now that consumers will eventually be forced to stop spending — but that hasn't happened yet.

For example, in the first half of 2022, Michael Burry of "The Big Short" fame warned on Twitter that cash-strapped Americans were saving less, borrowing more, and blowing through the extra cash they stashed away from stimulus checks and their cheaper lifestyles during the pandemic.

The Scion Asset Management chief noted that the personal saving rate had slumped to 2008 lows, personal savings had shrunk to 2013 levels, and the amount of revolving credit-card debt had rebounded to its pre-pandemic peak.

Burry predicted that dwindling savings and ballooning debts would choke consumer spending, eroding corporate earnings and sparking a wider recession.

Similarly, Elon Musk flagged consumers' challenges on a Tesla earnings call in October.

"A large number of people are living paycheck to paycheck and with a lot of debt," he said, adding that credit-card payments had jumped to "extremely punishing" levels.

Carl Weinberg, the chief economist at High Frequency Economics, said in December that consumers were "waking up" to the fact that the interest payments on their credit cards were "over the top, out of control, off the hook." He said that was "going to lead to a retrenchment in consumer spending as we get into the new year."

For now, resilient consumer spending has shored up company profits, helped to keep unemployment at multi-decade lows, and fueled surprisingly strong economic growth.

Will consumers finally tap out?

Consumers may have prevented a recession last year, but as Burry warned, their spending came at a cost.

The personal saving rate — or the percentage of people's disposable income they put away monthly — slowed to 3.7% in December, close to its lowest level since the financial crisis.

The volume of personal savings also shrunk to around 2017 levels, while the amounts owed on credit cards and other consumer loans have steadily climbed to record levels.

David Rosenberg, the president of Rosenberg Research who was a chief North American economist at Merrill Lynch, called out excessive debt reliance this month.

"Not even a 500 basis point interest rate shock could manage to derail a consumer still addicted to debt," he wrote. "A recession averted as Main Street took a feather out of Wall Street's cap — leverage!"

Rosenberg pointed out in a February 15 note that monthly retail sales dropped 2.4% in the 12 months to January, signaling a spending slowdown. He said that "brings us just a little closer to the consumer recession that nobody believes is going to happen."

Gary Shilling, Merrill Lynch's first chief economist who has run his own advisory firm for more than four decades, warned in his latest "Insight" newsletter for March that consumer spending would probably cool, throttling the broader economy.

"Drawing down savings and increasing debts have allowed many Americans to spend in excess of their incomes," he said. "With those sources of funding largely exhausted, consumer spending will no doubt grow more slowly than after-tax incomes in future years."

Shilling added: "Since consumer spending accounts for 70% of GDP and no other sector is showing meaningful strength, total US economic growth this year will no doubt be muted, even if a recession is avoided."

No clear answers

Nobody can say for sure whether consumers truly are at breaking point.

The federal government revised its personal-savings estimate in September, pushing back the potential timing of when consumers would run short of cash — and the same thing could happen again.

Consumer spending could also be juiced if inflation moves closer to the Fed's 2% target. The central bank may promptly slash rates, stimulating the economy and boosting everything from retail sales to corporate earnings and stocks to bitcoin.

But consumer spending may falter if stubborn inflation means rates stay high, and industries such as regional banking and commercial real estate feel even more pain. The result could be growth stagnating, unemployment soaring, and a severe recession taking hold.

Whatever happens, consumers should be watched closely as they might well hold the fate of the economy in their hands.