Is the economy in better shape than CFOs think?

Much of the economic news these days feels like we’re headed in the wrong direction. Oil prices are high. Inflation is on the rise. Consumers are gloomy. Pundits are raising the specter of stagflation and calculating the odds of a recession.

Though some indicators are worrisome, the economy as a whole is in better shape than people give it credit for, Fifth Third Bank Chief Economist Jeffrey Korzenik believes. And the discourse around the “K-shaped economy” may be distorted.

Low debt ratios. Though lower-income consumers are showing signs of stress, on the whole “the American consumer has a tremendous amount of resiliency,” Korzenik told CFO Brew. Consumers’ debt relative to their disposable income is “near multi-generational lows,” he pointed out during a session at the AICPA CFO Conference in April. That leaves households better able to “withstand shocks” such as high energy prices, he noted.

Headlines that refer to “historically high levels” of consumer debt misstate an economic reality, he said at the conference. “As our economy grows, every kind of debt is going to move to historical highs over time. We’re just a bigger economy,” he pointed out.

Though loan delinquencies on car, credit card, and mortgage debt have increased recently, they’ve been on the rise since about 2022, his data shows. “We do have somewhat elevated levels of delinquencies, but they’re not the kind of levels that we would expect running up to a recession,” he said. “They’re just more typical of where they were” prior to pandemic-era relief programs, he added.

A return to normal? On the whole, “the consumer is just doing okay,” Korzenik said, noting that retail sales are experiencing “quite tepid” growth of around 3.5% year over year. Less-affluent consumers are indeed “decreasing their share of consumption in the US economy,” he said.

That said, Korzenik doesn’t believe the slowdown in lower-end consumer spending necessarily presages a downturn. He questions the belief that we’ve only recently become a “K-shaped economy,” in which higher-income households’ spending rises while less well-off consumers’ spending drops.

The “K-shaped” narrative, he thinks, is due partly to an error in historical perspective. High-income consumers, he noted, have historically been responsible for the bulk of US consumption. That briefly changed post-Covid, when lower-income households benefited disproportionately from stimulus money and additions to unemployment through the CARES Act.

“If your historical perspective started in 2020 and 2021, it looks like lower-income consumers are deteriorating,” he said. But that period was a “relative boom time” for that income bracket. Now, “that sugar high has worn off,” he said. “What people are referring to as a K-shaped recovery is in many ways more of a return to normal.”

Observers are correct to notice, though, that labor is seeing less benefit from GDP gain than owners are, Korzenik said. “This has been a great economy to be a shareholder and a less great economy to be an employee,” he said. Higher-income consumers are experiencing more of the benefits from recent economic growth due to factors such as “capital gains in ownership, pass-through dividends, [and] pass-through earnings.”

Inflation will be sticky. Korzenik does expect the war in Iran and consequent high prices for energy and commodities, such as fertilizer and aluminum, to lead to inflation. It likely won’t be a one-time shock, he said, but something more persistent: “The reality is there [are] ripple effects,” he said, especially in regards to high diesel prices that will raise transportation costs. “Some of this is going to persist for longer than we would like,” he said.

Inflation will likely counteract the positive effect this year’s tax refunds might have had on the economy, Korzenik predicts. “In aggregate, the benefits of the One Beautiful Bill are being used to cushion the cost of higher energy prices,” he said. However, as Korzenik noted during the conference, “we at Fifth Third Bank believe that the economy has sufficient resiliency to carry us through all the current events today.”