CASH IS KING — There’s one thing that tends to make recessions less likely to happen and less painful when they do occur: people having money. Sounds obvious. But it’s not always the case when recessions arrive. And right now, both U.S. households and corporations still look fairly flush. Though Americans’ Covid-era savings are nowhere close to where they were at the height of the pandemic in the first half of 2020, households still have roughly $1.7 trillion in excess cash in the bank to keep spending even as record-high inflation slices away their wage gains. This is among the many factors that still have some hopeful economists — and the Biden White House — thinking the U.S. can avoid recession even as the Federal Reserve jacks up interest rates. We should start this discussion by noting that recessions can occur in very different shapes and levels of virulence. Generally, the simpler ones to navigate are driven by inflation, like we have now, rather than massive overhanging debt, like the Great Recession that hit in 2007 as the housing bubble burst. The current level of U.S. household savings now is far higher than it was at the dawn of the financial crisis when lightly-regulated banks built up huge and highly risky debt which nearly toppled the financial system. Americans had essentially no excess cash saved at the time. Credit to businesses went dry, consumers found themselves both with limited savings and much less valuable homes. Consumer spending, which drives two-thirds of the economy, swiftly vanished and unemployment shot to 10 percent. Structural collapses in the housing and financial sectors took a decade to rebuild. This year, consumer spending has held up remarkably well despite persistent 8 percent inflation. And that’s because of all that built up savings. Some of the cash came from the over $4 trillion in federal stimulus money showered on the economy during and after the crisis, which is at least one factor in current high inflation. A lot of federal cash, especially among lower-income consumers, has already been spent. But plenty of cash remains in the bank for those in middle and upper income brackets, a result of generally decreased spending during Covid and wages that until recently were rising faster than inflation. It’s not just consumers either. Corporate America is in vastly better financial shape to weather a Fed-induced slowdown than it was when the housing bubble burst. Banks hold much stronger and safer capital buffers. Cash and cash equivalents per share among S&P-500 companies is about three-times what it was before the global financial crisis, according to Morgan Stanley. The trends in all of this are not great, of course . The household savings rate plunged to 3.3 percent in the third quarter of this year, down 88 percent from its Covid-era high. Consumers are increasingly turning to credit cards to cover regular expenses with balances jumping an annualized 15 percent in the third quarter of this year to $930 billion — the biggest such increase in two decades. The remaining excess cash will eventually run dry if the Fed really misses the mark and over-tightens the economy. But right now, while polls show Americans still continue to despise this inflated economy, they are still spending money. That likely means fewer near-term layoffs as companies use some of their balance sheet strength to weather any downturn while not shedding massive numbers of workers in a labor market that remains very tight. Retail sales notched their biggest gain in eight months in October despite multiple Fed rate hikes. All this helps explain why the outlook for Thanksgiving travel is so robust. AAA expects around 53.6 million Americans to hit the roads and airports over the holiday, nearly back to pre-pandemic levels. That simply would not be happening without Americans’ cash cushion. Holiday season retail sales are expected to show less growth than last year, but not fall off a cliff. So as you prepare to stuff yourself and doze off to the evening football game on Thursday, take heart that while recession is still very possible — in fact quite likely — it is not inevitable. And it doesn’t have to be that bad. Welcome to POLITICO Nightly. Reach out with news, tips and ideas at nightly@politico.com . Or contact tonight’s author at bwhite@politico.com or on Twitter at @morningmoneyben . A programming note: Nightly will be off for Thanksgiving this Thursday and Friday but back to our normal schedule on Monday, Nov. 28.
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