When the warm weather vanishes at the end of this summer season, it could take the economy’s unexpected buoyancy with it.
According to Wharton professor Jeremy Siegel, the U.S. economy appears to be “progressing smoothly, with a resilient consumer impervious to the impact of higher borrowing costs.”
These spenders are the “YOLO (you only live once) consumers” who, Siegel believes, are spending the last of their cash reserves on traveling and enjoying the summer.
However, the Russell E. Palmer professor emeritus of finance warned that this could signal “the last good stretches for the economy before the summer ends and credit card bills come due.” He added that in the past, when students return to school in September and October, this has previously made for some “dicey periods for the markets.”
Professor Siegel also issued a warning to the Fed, to which he has previously appealed to pause rate hikes. The finance and economics expert said it would be a “mistake” for the Fed to wait until it saw a downturn in the jobs market before it began easing rate hikes.
“The Fed needs to only look back at its own experience calling inflation transitory to see how long it could take for inflation to turn around—and once a weakening in the economy kicks in, it could come fast,” professor Siegel wrote in his weekly WisdomTree note.
Yet Siegel believes there will neither be crisis or complete calm on the markets, saying: “I do not think the second half of the year will be a great time for the markets, but I don’t see it deteriorating dramatically either.
“There will be a battle in the market dynamics between recession fears and a slowdown, with thoughts the Fed will respond by bringing in more accommodation and lowering rates.”
‘The Bond King’ agrees
Legendary billionaire investor Bill Gross has also said he believes the coffers of American consumers will run dry by the end of the year.
Experts have long believed the Fed was going to push the public to the “point of pain” in order to get demand-driven inflation under control, with Bank of America analysts predicting in March that “the Fed might have to raise rates closer to 6% to get inflation back to target.”
Currently inflation stands at 3.1%—the lowest since March 2021—after the Fed has hiked rates to the 5.00% to 5.25% range, with warnings it may push through two more 25-basis-point hikes before the year is out.
And the theory of Gross—known as “the Bond King” for having cofounded fixed-income giant Pimco before managing its flagship bond fund—fits with that timeline.
The Wall Street titan reportedly worth $2.6 billion tweeted Monday: “4 trillion of COVID spending still dripping into economy with consumers still spending their last $500 billion or so. The trick is when to time the end of it.
“Fourth quarter is best guess.”
It’s fiscal policy not just monetary policy — stupid.
— Bill Gross (@real_bill_gross) July 10, 2023
4 trillion of Covid spending still dripping into economy with consumers still spending their last 500 billion or so.
The trick is when to time the end of it. 4th quarter is best guess.
Gross isn’t the only one warning of a cash crunch. Back in October, JPMorgan boss Jamie Dimon also warned that consumer spending would run out this summer, after being battered by inflation from volatile energy prices and ongoing uncertainty arising from the Russian invasion of Ukraine.
Meanwhile Michael Burry, of Big Short fame, has been warning of a consumer recession for more than a year, initially predicting the slowdown would fall during Christmas of 2022.