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Have leftover stimulus funds helped us avoid a recession?

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There’s a reason why consumer spending has remained strong despite inflation.

Most important points

  • Many economists have warned that a recession could hit in 2023.
  • A sharp drop in consumer spending could fuel a downturn.
  • Leftover stimulus funds from 2021 may have helped consumer spending remain strong so far.

For much of 2022, economists made it a point to warn consumers of a potential recession in 2023. Last year, consumers were told — repeatedly — to increase their savings and pay off debt ahead of a potential economic downturn .

But so far we don’t seem to be moving any closer to a broad economic downturn. And while consumer spending has fallen in recent months, it has fallen only modestly despite inflation. However, leftover stimulus funds may be the reason.

Consumers may still have money in the bank

In December, consumer spending fell for the second month in a row. It was down 0.2% compared to November, according to data from the Commerce Department, as reported by Reuters. And in November, consumer spending fell 0.1% compared to October.

Given the way inflation rose last year, these declines are quite modest. And even if this trend continues, it probably won’t be enough to spark a major recession in 2023.

But we could see consumer spending start falling more extreme this year for a very important reason, and it’s not inflation. Rather, consumer spending could fall once the remaining 2021 stimulus funds run out.

In 2021, lawmakers have been extremely generous with their stimulus policies. They approved a round of $1,400 checks that hit recipients’ bank accounts in March of that year. They also gave a big boost to the child tax credit, raising the maximum value from $2,000 per child to $3,000 per child ages 6 to 17 and $3,600 per child under age 6. In addition, the full tax credit for children was fully refunded, so that recipients with no tax liability can fully claim its value.

Some people needed the stimulus funds they received in 2021 to cover their short-term expenses as inflation started to pick up. But many people who received pocket money from the government that year did not need the money right away. So instead they kept it. And in 2022, they had the ability to keep spending even as the cost of living skyrocketed.

But right now, much of that stimulus money is running out. So while leftover stimulus funds may have helped us stave off a recession so far, things doing have the potential to take a turn once that lifeline dries up.

It pays to prepare for a recession

A recession in 2023 is far from certain. But it’s a good idea to prepare for it by saving as much as you can. A recession can lead to widespread layoffs, and one of the best ways to cope with a job loss is to have cash reserves to fall back on.

Granted, if a recession hits and the wider economic situation becomes dire enough, lawmakers could be prompted to issue another round of stimulus funding. But in a more mild or moderate recession, that’s less likely. So instead of resorting to more stimulus support, consumers should individually prepare for a recession by increasing their savings.

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