Paul Isely: As we went through 2023, the overriding concern for economists across the US, including myself, was how fast would the consumer use up that excess wealth that they acquired during COVID? And they acquired that through government handouts, they acquired that through increasing wages and through the fact that they really for a year couldn't spend money. All right. And so, what we saw is people's savings really, really went up. All right, and their debt went down. A lot of economists, including me, thought that would happen in the third quarter of last year, that we would have the consumer having eaten through this excess funds and it would lead to a slowdown as we went out of the third quarter. And we were wrong. We were wrong partially because the data we had was bad. The amount of money that people actually got through COVID was higher than we actually first thought. and partially because people have become more innovative in how they borrow money, particularly in things like buy now, pay later, because that doesn't actually show up in any of our data. So, what ends up happening is they can buy now, pay later, and they're shifting that purchase costs into next year. So, as we got to the end of the year, we now, pulling all of that type of data together, find that at the end of last year, adjusted for inflation, because the amount that they used up this excess wealth that they had generated during COVID. And things are back to where we would expect them to be. So, this leads us into a dangerous area as we head into the coming year. Does the consumer find a way to limp along and continue to spend, or do they reach a point where they cannot borrow money in a way that allows them to continue to consume as quickly as they have been consuming? And Economic models are really, really bad at exactly this point in forecasting what will happen. The Federal Reserve did a study a few years ago and found out that really when there's a very fast change in the economy, is exactly when economists tend to get it wrong. And that's because our models are designed to take what's been happening and extend it out into the future. What I'm worried about right now is that although our models are showing slower growth than what we had last year, it's just showing it to be marginally slower than what we had last year. But this consumer has now reached a point where they may not be able to access funds to continue to consume the way they have. And if that happens, we get what's called a right turn. Think about it this way. Forecasting, what you're using is past data to try and forecast the future. So, it's like driving down the road at 90 miles an hour using only your rear-view mirror. If the road is lightly bending or going straight, you're pretty good at staying on the road. But if there's a stop sign or a right turn, you'll never see it. And right now, the risk of that right turn is really starting to grow as the consumer becomes more stressed.
Patrick Center: You mention buy now, pay later. What else are we seeing with the consumer that would contribute to this right-turn crash, for lack of a better term.
Paul Isely: Let's knock through several things. First of all, we see that wealth overhang adjusted for inflation, at least the liquid part of that wealth, has retreated back to what would be considered normal. We see increases in buy now, pay later during December that a third of the growth in consumption that we saw in December was a result of those things. So that's borrowing. We've seen credit card debt hit record levels. We're seeing transition to 30 days late on their debt starting to grow and get back to normal levels and maybe overshoot it as we go into the first quarter. We already see transitioning to 90 days late on automobile loans. For those under the age of 40, we are already seeing that as bad as at any point in the last 25 years other than 2009. And those of us old enough to remember 2009 don't want to go back there. For people over 40, we've seen an increase. We've seen late payments increase, but not as much. And in fact, it's just back to normal for that group. So, we're seeing a lot of stress for young consumers and a lot less stress for older consumers. And so how that plays out will become very, very interesting.
Patrick Center: As a historian, are there other points in time where we have seen this kind of consumer weakness that has caused issues in the economy, where we see potential for a recession or other issues that slow down the economy?
Paul Isely: The consumer pulling back really is a hallmark of the things that we saw in the 70s. And so that's there. We have another really weird piece out there, which is that the money supply has actually dropped. And the last time we saw a decrease in the money supply on par with what we've seen over the last year and a half is the 1930s. Another time where we had a hard time having consumers with enough income to move things forward.
Patrick Center: For anybody not familiar with that terminology, what do you mean by money supply?
Paul Isely: So, it's the amount of money that's out there for people to spend. So, the Federal Reserve actually is changing the interest rates, helping those interest rates go up by decreasing the amount of money that's available. And that actually increases the interest rates. So, in order to have a transaction, a dollar bill has to exchange between two people. And therefore, as we decrease the amount of money that's available, each piece of money becomes worth more, which means that inflation comes down, because you can buy more things with a dollar. And so, the Federal Reserve has been doing that. But as you do that, it also slows down the overall economy.
Patrick Center: Is the Federal Reserve monitoring consumer confidence, consumer spending, consumer debt like you are? And how could it or would it act as we move into the year?
Paul Isely: So, the question then, and what the markets are betting on, is that the Federal Reserve is looking at this and going, ‘oh my, we're going to have to loosen up and we're going to have to increase the money supply and decrease the interest rates.’ And so, the markets are betting on the fact that the Federal Reserve will make interest rates go down this year. If the Federal Reserve is focused on core inflation, many of us are unsure that they actually have the leeway to actually do that.
Patrick Center: What's your prediction?
Paul Isely: I think we'll see interest rates go down a bit. I don't think they'll go down as much as the markets have already tried to bring in. And it's going to be a very interesting year where we have to pay very close attention to the consumer again this year to make sure, do they hit a wall? Because if they do, we'll see it. We'll see it pretty quickly. And if they don't, that's great. And we'll have a year that's a little slower than last year. And we'll still see growth. Here in West Michigan, we won't have anything that would be even vaguely called a recession. If the consumer hits the brakes faster than what our models are predicting right now, then we have to worry about them pulling the economy back into a recession. It's a risk. It's not a foregone conclusion. It's a risk. And I think it's an increasing risk.
Patrick Center: Dr. Paul Isley, you're the Associate Dean in the Seidman College of Business at Gran Valley State University. Thank you so much.
Paul Isely: Thank you.