On the verge of a recession, it seems like each person has a different opinion: will we narrowly avoid it or fall in headfirst? It can be somewhat difficult to decipher given the positive trajectory of historical indicators such as unemployment dropping to a 53-year low and January 2023 U.S. retail sales being UP 3% from the prior month. However, while these initially seem to represent a growing economy, digging deeper into the data suggests that consumer financial health is struggling, and the strong gains in one area might not be as supportive as headlines imply.
Looking at unemployment, US based employers announced 102,943 job cuts in January 2023 alone, the most since September 2020 and the highest January total since 2009. The technology sector announced the most with 41,829, 41% of all cuts. Meanwhile, the second highest sector, retail, announced 13,000 jobs lost and the third highest sector, real estate, announced only 2,000. With so many job losses how can unemployment fall to such historic lows? The service sector, which includes leisure, foodservice, and healthcare, and accounts for 36% of all private-sector jobs, added 1.19 million jobs over the past six months, or 63% of all private-sector job gains during that time, UP from 47% over the same time last year. The tech-heavy information sector on the other hand accounts for only 2% of all private-sector jobs.
So, while employment gains and losses were in very different sectors and industries, the unemployment rate only reflects the overall net gain. This becomes important when remembering that the service sector saw the largest employment decline during the pandemic when 22 million jobs were lost. Since then, the industry has struggled to return staffing rates to pre-pandemic levels. This indicates that employment growth in the service sector is more restorative than bullish, while a rise in layoffs also points to a negative economic outlook from companies as they attempt to lower their operational costs.
In combination with jobs data, US retail sales climbed in January from December which also initially appears supportive. However, while consumers continue to spend, they are not in as prosperous of a financial situation as the data suggests. Goldman Sachs estimates that consumers have spent 35% of the savings they built during the pandemic and forecasts that they will have burned through 65% by the end of 2023. As prices for goods and services have increased and remain elevated compared to the same time last year, the added financial stress has pushed borrowers to put more purchases on credit cards and, with high interest rates, they are struggling to pay those balances down.
As a result, banks have begun to build their reserves in preparation for higher delinquency rates. In their Q4 2022 financial report, Discover Financial Services, noted that their personal-loan balances grew 14% from the prior year, while 2% of its private student loans were 30 or more days delinquent, half a percentage point increase from 2021. Capital One Financial Corp. announced they have set aside roughly $1 billion to cover potential loan losses in the fourth quarter, UP 33% from Q3, while American Express increased its reserves by more than 25%, setting aside nearly $500 million to cover potential losses. Goldman Sachs also recently announced they are scaling back their consumer-banking business by ending personal-loan originations, citing they had lost $3.8 billion on a pretax basis since the beginning of 2020 through credit card partnerships, most of which was due to money set aside to cover potential loan losses.
The increased debt that consumers are taking on with high interest rates will continue to pose problematic as borrowers attempt to dig their way out while simultaneously trying to afford skyrocketing costs of food, fuel, and rent. Although the unemployment rate remains low as the service sector strives to reach pre-pandemic staffing levels, these job gains are most likely partially driven by consumers taking on a second job as they struggle to afford the rising cost of living. Ultimately, consumers’ financial health is poorer than these indicators initially show suggesting that a downturn of the economy is more probable than not.