What Happens When The Interest Rate Tsunami Hits Consumers?

The forces bearing down on the US economy are so varied and mostly uncontrollable that it seems impossible for consumer-facing businesses to accurately forecast demand, let alone plan for it. Wall Street has already cast its vote — there’s a recession coming (or maybe already here).

Since the fourth quarter of 2021, investors have been punishing the S&P 500 index, driving it down by nearly 25% of its peak value. That roughly translates into a loss of equity, and a plunge in investment accounts, of $10 trillion.

If the money merchants are right, the question becomes whether a chart of the expected recession will be shaped like a soup bowl — a wide shallow sag, not so bad — or will it look more like a sinkhole?

The answer will depend heavily on how consumers deal with the inevitable knock-on effects of rising interest rates. According to Federal Reserve data, consumer personal expenditures represent nearly 70% of the US economy, the highest in more than 75 years of data. We live in a consumer-dominated economy and Wall Streeters have placed their bets here as well.

The S&P Retail Industry Index has been hammered in the past year, down by nearly 45 percent. Yet consumer spending has managed to limp along, roughly keeping pace with inflation.

What might Wall Street know that consumers don’t?

For the moment, the news about rising interest rates has largely been background noise. On the other hand, inflation is something consumers experience every day, everywhere, on every major street intersection. Consumers are paying attention to the price of everything, from eggs to cars.

But next year will be the real test as consumers become more aware of declining equity values in their homes. This is especially true for those millions who dashed out and bought second homes to escape the pandemic.

After two years of chasing and overpaying for a COVID-free country life, nearly 75% of recent homebuyers say they regret their decisions, according to a recent report by Anytime Estimate’s American Home Buyer Survey.

The survey found that 70% of buyers in 2021 and 2022 were first timers.

A third paid over asking price.

Because so much of American consumer wealth is tied up in real estate, home values could play a huge role in the depth and length of a recession.

As of now, those real estate values have been holding up, on paper. According to a recent report from real estate data firm CoreLogicCLGX
, the average homeowner’s equity is now nearly $300,000 — a record high. But prices rose so much so fast that current levels are unsustainable. If history is a guide, the best model for next year might look like the economic crisis that began in 2008 when the mortgage market collapsed. Or maybe not. No one really knows.

The key takeaway: it didn’t happen overnight or even in a few months. It took all of six years for the median price of an American home to collapse and recover to pre-calamity levels. Along the way the economy tanked, and unemployment soared.

Curiously, in this case unemployment rates are at all-time lows according to the following statistics.

Finally, tax time will be a wakeup call for many when their accountants produce reports showing diminished investment portfolios and retirement accounts. Credit card payments are going up as interest rates are adjusted to higher levels.

All these factors will weigh on the consumer and figuring out how to navigate these treacherous economic waters will be a primary focus of retai

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