Most Americans believe their country is in the midst of a recession—but it isn’t—at least not yet. According to a recent Harris Poll conducted on behalf of The Guardian, almost 60 percent of Americans believe the economy is shrinking. The truth is employment is on the up, and the economy appears to be returning to health if GDP growth is anything to go by.

On the surface, the survey might appear to have more to say about respondent’s economic literacy than the economy itself. However, the widespread feeling that the economy isn’t working for individuals tells us something important about metrics that impact people in a real way, such as wages and interest rates. And this apparent failure of economic successes to trickle down, might indicate trouble brewing, with some analysts warning that spectre of recession still looms.

Consumers struggling despite economic growth

A new American credit crunch could be on the horizon, according to reporting by The Economist. The outlet reported a fall in monthly consumer-spending growth to just 0.2 per cent in April, down from 0.7 in March. As a result, retail sales have suffered, and consumers are struggling to keep up with their debt obligations. As the Economist Reports:

“According to the San Francisco Fed, households burned through the last of their $2.1trn of pandemic-era excess savings in March. The drawdown has pushed more and more to rely on credit cards to meet their outgoings, and some are now struggling to repay debts. Paul Siegfried of Transunion, a credit bureau, estimates that since April last year, 440,000 credit card holders have been downgraded to subprime status.

Accounts are becoming delinquent at a pace last seen in 2011. People who have taken out loans to buy cars are falling behind on repayments almost as fast, causing some to sell their vehicles. According to Kelley Blue Book, a sales platform, used-car listings were up 6% in May from a year earlier.”

It marks a worsening of the picture in April when credit card delinquency was at its highest level since 2012. A Harris Poll for Bloomberg showed 43 percent of ‘buy now pay later’ service users were behind on their payments. Critics have attacked the subprime scheme for targeting the vulnerable and potentially catching them in a debt trap.

The Federal Reserve has made its concern over consumer delinquencies public, with Austan Goolsbee warning it could be a signal that “Things are about to get worse.” The US economy has been boosted by resilient consumer spending in recent months; however, concern is now mounting that the boom may have been built on unsustainable credit, and could now be headed for a bus.

Job growth is up but wages are down

While the US economy is exceeding expectations for job growth, American workers are battling falling wages and increased reliance on credit. The latest job numbers show that in May, the US created 272,000 jobs, the 27th consecutive month in which the jobless rate has fallen. Responding to the figures, Chris Rupkey of FwdBonds, said it was unclear what to make of the data, issuing a note as per CNN saying:

“Is it safe out there for consumers and businesses or is the economy on the cusp of a recession?”

At the same time, many workers have less money in their pockets. A March analysis by the BBC showed workers laid off in the post-pandemic period were finding newly advertised roles paid less – even if they were functionally the same jobs. Speaking to the outlet, Nick Bunker of North American Economic Research at Indeed blamed an oversupply in the labour market, while at the same time, the number of jobs being posted fell.

It was a view shared by Chris Rice of Riviera Partners, who told the Washington Times:

“We saw a massive bull run in the market during the pandemic, where there was a big increase in brline compensation for workers because of talent shortages…We’re still seeing a market reset that’s ongoing. An oversupply means compensation has dropped because the demand is no longer there.”

However, other analysts have claimed the slump is a correction for US wage growth being so fast out the gate to recover in the immediate aftermath of COVID-19. In either case, with inflation biting, more workers are struggling to keep up with their debt obligations.

Does the stock market point toward a slump?

Volatility in the US stock market could be a sign of trouble ahead, an analyst has warned. Fears are mounting that the economy could be about to stutter amid reported nervousness by investors following a slump in manufacturing activity. Speaking to Reuters, Chris Scicluna of Daiawa Capital said recent volatility may indicate the economic position is not as strong as it might appear. He said:

“It is understandable why the market behaved as it did in the first quarter, but if one looked at broader indicators, there have always been certain signs that maybe the story isn’t quite as strong as might have been expected.

Most people would have assumed that where the Fed funds rate is right now is in restrictive territory. That is bearing down on underlying inflation and bearing down on some of the dynamism in spending.”

Analysts faced an even starker warning that the S&P 500 could potentially be headed for a crash, from former JPMorgan banker Jon Wolfenbarger. According to UKInvesting, Wolfenbarger forecasts the S&P 500 could fall as much as 50 per cent, pointing toward high inflation, Treasury yield curve inversion and high market valuations on the Shiller CAPE ratio as warning signs.

Could borrowing send the economy off the edge?

While we can learn a lot from the day-to-day movement of the economy, the stubborn elephant in the room that overshadows continued US prosperity is its enormous and mounting debt obligations. The US government owes more than $34 trillion to creditors – well in excess of national GDP, which stands at $25.4 trillion. And according to some observers, it is a ticking time bomb. In a recent report GIS warned that without immediate action, the so-called ‘do nothing’ option, the US economy would quickly find itself in danger:

“If the U.S. government fails to react to sputtering growth, the country will see severe consequences in the next couple of years. The aggravated public debt crisis will create uncertainty, harm investments and ultimately further depress economic activity. A dangerous downward spiral of political and economic trouble will follow.”

Analysts agree recession is not imminent.

While many indicators such as employment growth and GDP performance point toward a robust economic performance, analysts maintain concern over structural weaknesses which may reveal a more precarious situation than surface indicators show.

Despite job growth, the struggle with stagnant or declining wages is real for many households. Many workers find themselves with lower wages than before and reduced purchasing power eroded by inflation. This wage stagnation, coupled with rising living costs, has pushed many consumers into reliance on credit, resulting in more than decade-long high levels of delinquencies. This isn’t just a problem for individuals, but one that could rebound onto the wider economy if dire consequences if a credit crunch is triggered.

The depletion of pandemic-era savings has left many households vulnerable, relying on credit to bridge the gap between their income and expenses. As a result, the rise in loan defaults, particularly in the auto sector, and the spike in used-car listings indicate financial strain that could cascade into other sectors of the economy.

With consumer spending being a primary driver of economic growth, the reliance on unsustainable credit raises alarms about the long-term viability of this growth.

The potential for a downturn becomes more pronounced if consumer spending retracts significantly due to overleveraged households defaulting on their obligations.

Some analysts have indicated the stock market’s volatility bears the hallmarks of warnings of a potential crash. They point to various indicators, including high inflation, Treasury yield curve inversion, and market valuations, as precursors to possible economic turmoil. These financial market signals, combined with reduced manufacturing activity, paint an uncertain picture of the economy’s trajectory.

Furthermore, the towering national debt looms as a significant threat. The US government’s debt, exceeding its GDP, poses a long-term risk to economic stability. Many economists agree that without proactive measures to address this debt, the nation faces the prospect of aggravated public debt crises, which could deter investments and stymie economic growth. This scenario could initiate a downward spiral, exacerbating both political and economic challenges.

However, while observers should pay heed to longer-term trends and underlying vulnerabilities, there appears to be no imminent danger of the US sliding into recession. While most forecasters predict growth will cool throughout the year, it isn’t expected to die off. Deloitte’s baseline analysis remains optimistic – at least it says so in the short term.