2 Ways Consumers Could Force a Recession in 2023 As A Response to the Banking Crisis

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Wall Street economists and various financial forecasters have been debating whether the U.S. is heading into a recession for months. Although most agree that if it comes, a recession is likely to hit the country in the second half of 2023, recent bank failures have thrown another wrench in the gears of an already teetering economy.

The pandemic taught people how to live with an emergency mindset — how to adapt their daily and long-term spending plans and form more resilient habits. But how consumers behave amid this latest banking crisis may determine the severity of a potential forthcoming recession.  Specifically, the impact of the”wealth effect,” which is the belief that people spend less when they feel less prosperous.

“The bank problems are probably making a lot of people think twice,” said Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor and current economics professor at George Washington University told CNBC.

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Furchtgott-Roth continued, adding that the continued resilience of the strong U.S. labor market and economy is far from certain.

“It remains to be seen if we will continue to do so, and partly it comes down to consumer confidence,” she said. “People are definitely shaken up.”

Considering personal consumption spending accounts for roughly two-thirds of the American economy’s gross domestic product, consumer confidence is a valued measure of the overall health of the economy.

According to CNBC, both the University of Michigan’s Index of Consumer Sentiment and the Conference Board’s Consumer Confidence Index are down. The decrease of around 5% since February of U of M’s sentiment index was already accomplished before the Silicon Valley Bank and Signature Bank failures.

Consumer Spending

During these uncertain times, consumers may become hesitant about spending money or investing in stocks due to fears of further losses or lack of confidence in the markets. This hesitancy can lead to a spending pullback and decreased investing which can exacerbate the existing near-recessionary cycle by reducing demand for goods and services as well as employment opportunities.

However, while many consumers will feel the sudden urge to tighten their belts, people are spenders by nature. Consumers will always want to shop and maintain a certain lifestyle. Writing for Forbes, CEO and co-founder of Cure Media, Sam Foroozesh, notes that the buying public isn’t going to turn frugal overnight. Americans will still look for purchasing opportunities but may be opting to make “small compromises rather than wholesale sacrifices” during volatile economic periods.

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By maintaining healthy spending habits during good economic times, consumers can help fuel continued growth which reduces the likelihood of a future recession developing due to lack of demand or investment opportunities.

“Prepared as this group is to make some compromises in the short-term, they will continue to seek out their preferred brands for essentials and will even purchase extra if they find a good deal,” said Foroozesh. “Further to this, they will still shop for occasional treats if they feel they can justify them.”

Bank Lending

As the Federal Reserve continues to raise interest rates its fight to tame inflation, adjusted income keeps going down. As CNBC reports, Fed chair Jerome Powell says that disruptions in the financial sector will cause the major banks to toughen their standards, making it harder for Americans to borrow and causing reduced demand for business and consumer credit.

Short of engaging with financial institutions responsibly — for example, paying down debt — during healthy times and helping to reduce vulnerability should another financial crisis occur in the future, consumers and businesses will be tentative to take out loans until inflation eventually falls.  

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But just how much consumer behavior will affect a possible recession is debatable. As Fortune notes, many experts are looking to the Fed’s rate policies, Russia-Ukraine war and persistent high inflation as more critical driving forces.

Jeffrey Fuhrer, senior fellow at the Harvard Kennedy School and the former executive vice president at the Federal Reserve Bank of Boston, feels a falling consumer sentiment index is a reaction to the current economic state rather than its source, saying, “Sentiment is high when incomes, employment, and stock prices are high.”

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About the Author

David Nadelle is a freelance editor and writer based in Ottawa, Canada. After working in the energy industry for 18 years, he decided to change careers in 2016 and concentrate full-time on all aspects of writing. He recently completed a technical communication diploma and holds previous university degrees in journalism, sociology and criminology. David has covered a wide variety of financial and lifestyle topics for numerous publications and has experience copywriting for the retail industry.
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