Soft Landing Ahead? Yeah, Right!

If we're in such a booming economy, why is it that so much debt is accumulating? Credit card debt alone has topped $1.3 trillion. If consumers continue to use open credit, we are going to eventually see the consumer reach a point where they can't add any more payments. That means a slowdown in economic activity, and I believe that tips us into recession. The alternative is the Federal Reserve lower rates too soon and reignites inflation.

Hey, welcome to another edition of We're Talking Money. I'm Phil Clark with OmniStar Financial Group, and I want to talk to you today about the economy. Everybody's asking: are we headed to recession? What's next for the economy? Is the stock market stable?

Well, we've got the media telling us that everything is really good in our economy: lower inflation, higher wages keeping up with inflation, if not surpassing it. We've got a resilient consumer. All kinds of things seem to imply that everything's great and the economy is really strong. I'm looking at a set of data that just doesn't agree with that, and I'm trying to figure out who has it wrong. Tell me what you think in our comments. Is the media right? Is what I'm about to share with you right? I'd love to hear your thoughts.

So first, let's look at total debt. I'm speaking, of course, of consumer debt, and I've got a chart here. It clearly tells us total debt is just a little under $18 trillion. That's huge money. Now, the majority of that is in mortgages. That means there is trillions more at the consumer level as it relates to things like credit card debt, and you notice it's clearly going up. Now, if the economy is so resilient, consumers are making more money, my question is why?

Let's take all of that debt and let's break it into categories. So we're talking about student loans, we're talking credit cards, mortgage. What's interesting here is that every category of consumer spending, it's going up. In fact, the only one, as we dug into the report, that wasn't rising in recent years is home equity lines of credit. But everything else, it is moving up at a pretty fast clip, and it's really been rising since about 2014, but it is getting worse.

Some people will say to me, "Well, Phil, it's just because inflation is high. People have to spend more money, and so they're taking on more debt to survive." Well, if you go back to about 2014, when we come out of the Great Recession period, which started around 2008, spending, or consumer debt, was actually going down, and that was a good thing. People were almost forced to do that. We had things like major delinquency rates. People didn't have jobs; they certainly weren't as readily available. A lot of things were going on that caused consumers to sort of reset their balance sheet. It got people thinking more about being more responsible.

Today things are much worse. We have much greater debt sitting on consumers' balance sheets. You can't just blame it on inflation, but I do think inflation is a big part of that. I also think that wages are not actually as resilient or as good as the headlines might tell us. In fact, if we look at something called sticky inflation, what you'll find is that wages are not exceeding inflation.

If we're in such a booming economy, as the media would portend, why is it that so much debt is accumulating? People are in the habit of spending. All of us like to spend, and once you get in that habit, it's hard to break it. I think because the cost of living has rapidly risen, we have a real major dynamic going on here, and that is: how do we maintain lifestyle? But we also have to spend a lot more for the basics. Meet the credit card. And most people, whether they want to or not, are using credit cards to maintain lifestyle. Some people are simply using those credit cards to survive.

Credit card debt alone has topped 1.3 trillion do. That is a record. It's insane when you think about it. But here's what's worse: the average interest rate on credit cards today has reached 23%. Did you realize that if you have just $10,000 on a credit card at 23%, you're paying $2,300 every year in interest on that balance?

It's an unfortunate cycle that I think will get worse. As long as the consumer has some credit, at least they will look resilient. But as their debt grows, payments get larger. Now for student loans, those are being reintroduced. All of that's worth working against the consumer. At this point the consumer is going to need higher wages or they'll have to curtail spending. Remember, we live in a country where our gross domestic product is made up about 70% from the consumer. If the consumer has to slow spending, you can rest assured the economy will continue to slow down, and that means recession.

So for now, the Federal Reserve chairman, Jerome Powell, he seems pretty content leaving interest rates where they are. Now, I think the original plan was to lower them early in 2024. I don't believe that's going to happen. Inflation continues to be sticky, the consumer seems to be resilient, unemployment is low. All of those things work against the Fed being able to lower rates.

We're in 20124. The media is telling us that everything is great, and they seem to be stuck on this idea that wage growth is outpacing inflation. Well, let's look at a chart so you can see why I disagree with this. We have sticky CPI, we have hourly earnings, and it's easy to see that what the media is saying, it just isn't true. Sticky CPI is well above the hourly earnings plot. That tells me that the consumer is having a tough time. Consumers are going to need a lot of raises if we're going to avoid a big recession and have this so-called soft landing.

I think the consumer can service high debt. They can service high interest rates for a while, but eventually that is going to cut into new spending. There's a couple of possibilities here. If consumers continue to use open credit, and I believe there's still plenty of that available, we are going to eventually see the consumer reach a point where they can't add any more payments. And if interest stays high, that is going to exacerbate the pain that the consumer feels. That means a slowdown in economic activity, and I believe that tips us into recession. The alternative is the Federal Reserve lowers rates too soon and reignites inflation.

Either way, I think the consumer is hurting. I think we've all felt this, and I don't think it goes away anytime soon. In my opinion, this will end in a major economic setback, and I believe we will see an asset repricing, and that will affect everyone. The data doesn't lie. The Federal Reserve and our government, they can make things look good for a long time, and it's been a long time.

Hey, thanks for watching. I hope this video has given you a little insight as to how we feel about the economy. Tell me what you think. I'd love to hear your thoughts and opinions. In the meantime, we hope you enjoyed the show. We'll see you next time on We're Talking Money.