Dear Reader,
The American consumer surprised economists once again.
According to a BEA report, personal consumption expenditures (i.e., consumer spending) increased by 0.9% in April from the prior month.
This is a big deal as consumer spending represents around 70% of GDP.
And it comes as consumer sentiment continues to tumble.
In other words, what consumers are doing contradicts what consumers are saying.
Why is that?
It's simple: Consumers are in great financial shape.
In fact, this is a theme across the economy as businesses are also in great financial shape.
Households, corporations (including financially stretched sub-investment grade corporations), and small businesses are much more cash-rich than before the pandemic.
If the economy were slowing because consumers and businesses didn't have the financial capacity to spend and finance their debts, then we would have a big problem.
But this is not what's happening right now in this economy.
The Federal Reserve is currently engineering an economic growth slowdown amid a boom in its effort to get inflation down.
Any economic slowdown or recession will be challenging for consumers and businesses.
Some will do worse than others.
But as a whole, the finances of consumers and businesses are historically very strong.
And so, as the Fed tightens financial conditions in its effort to cool demand, don't expect the bottom to fall out. Consumers and businesses will continue to bolster the economy with their big balance sheets.
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