Why no recession yet?

American consumers keep buying despite high inflation and the contractionary policy of the Federal Reserve. They deserve thanks not only for the recession that has not come, but for the fast pace of recent economic growth.

Consumers have to cut back eventually, right? And when they do, does that mean a recession?

Part of the answer can be found in Americans’ bank accounts. A few years ago, they were flush with pandemic checks, but their owners had nowhere to spend their money. There are conflicting reports about whether excess savings have run out, even though spending is still strong.

A more detailed answer comes from the Fed, which recently released its tri-annual Survey of Consumer Finances. The short version: While many consumers are wealthier, others are spending on borrowed time.

The survey shows a sizable uptick in net worth among all income groups from 2019 to 2022. New wealth came from increases in the value of a household’s most illiquid asset: its home. Lower-income homeowners especially can thank the appreciation of real estate values for their increased wealth.

The value of consumers’ financial assets did increase, but for the bottom 50 percent the increase was not nearly as large. Among the bottom 20 percent, median financial assets increased from $1,300 to $1,400. These consumers are also more likely to keep their assets in cash, which was further eroded by inflation in the last year.

While financial-asset values have risen for every income group since 2019, at least when it comes to savings, those in the bottom 40 percent are much worse off now than they were on the eve of the financial crisis. A potential bright spot: Low mortgage rates helped increase homeownership for lower-income consumers.

The data show that the top 50 percent benefited from soaring house and asset prices in the last four years. The bottom 50 percent did a bit better at first, but still don’t have much liquidity and inflation has eroded their savings.

This points to a growing vulnerability in the economy. Even if there is a recession, the top half of Americans will probably be fine. Their spending will decline, but it is unlikely to plummet unless there is a huge drop in asset values. People in the bottom half of the economy, by contrast, do not have much in savings, and they could be in trouble if the job market cools off and inflation continues to be high.

Odds are that things will not get as bad as they were in 2008 when many people had mortgages they could not afford, and over-leveraged consumers caused a housing bust that decimated household wealth. Now many homeowners have cheap fixed-rate mortgages, which have only gotten cheaper with inflation. They are less likely to sell, at least not all at once, and crash the housing market.

An environment of rising interest rates creates a lot of vulnerabilities in the economy, and a weakening consumer sector will make it worse. American consumers may not be able to prevent a recession, but they won’t cause one, either.