Understanding the Current Threats to the U.S. Economy

The U.S. economy may not be in a recession, however, it faces several looming threats in the coming months that are expected to act as a drag on growth. The extent of the slowdown will depend largely on how these issues play out.

Impact of Autoworkers Strike

First up is the autoworkers strike at the Detroit Big Three: General Motors, Ford, and Stellantis. The United Auto Workers (UAW) has struck three production plants (one from each company) and 38 parts distribution centers for GM and Stellantis so far. Unfortunately, the two sides remain divided on a new wage deal, as the carmakers’ latest offer has not met the leader of the UAW’s demands. This impasse is likely to create significant issues for consumers, especially as vehicle inventories were just beginning to recover from COVID-era shortages.

If the strike continues, auto supplies will be severely impacted. New car prices are expected to increase by approximately 5%, while used-car prices may rise even faster, potentially by 10%. Additionally, service at dealerships could be hindered due to parts shortages.

Potential Government Shutdown

Next, there’s the potential government shutdown starting October 1. Congress is facing challenges in passing spending bills to fund federal agencies for the new fiscal year. Some House Republicans are pushing for substantial spending cuts, threatening a shutdown if their demands are not met, while Senate Democrats are firmly opposed to cuts. Consequently, the resolution remains unclear as lawmakers may resort to a temporary funding bill, merely deferring a shutdown and negatively impacting GDP growth.

Resumption of Student Loan Repayments

A looming issue is the resumption of student loan repayments set for October. Although not every borrower may be impacted since the White House has stated that nonpayment cannot be reported to credit bureaus, many will still have to devote part of their income to servicing debt. This shift could further limit discretionary spending available to consumers.

Consumer Spending and Economic Outlook

The most significant risk to growth lies in the predicted pullback in consumer spending. During the pandemic, savings accumulated as spending opportunities declined. Nevertheless, current data shows that consumers aren’t entirely out of funds yet; however, the average savings rate has dropped to 3.5%, down from a pre-COVID range of 7%-9%.

Additionally, low-income borrowers are beginning to struggle with debt payments, putting further strain on the economy. Higher-income households are also expected to tighten their budgets as their savings dwindle, leading retailers to contend with weakened consumer demand.

In conclusion, all these factors suggest a slower economy as 2024 approaches.