Why consumers and businesses will prevent any slowdown from becoming economic calamity 💰

Balance sheets are historically robust 🤑

Consumer spending continues to set new record highs.

The American consumer surprised economists once again.

According to a BEA report released Friday, personal consumption expenditures (i.e., consumer spending) increased by 0.9% in April from the prior month, which was stronger than the 0.8% gain expected. This is on top of March’s 1.4% growth rate, which was revised upward from last month’s estimate of 1.1% growth.

Even if you adjusted the numbers for inflation, real spending still grew by 0.7%.

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 is contradicting 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.

There are all sorts of ways to measure financial health (which we’ll get to below). One of those ways is captured in this chart from a Goldman Sachs research note circulated on May 1.

Households, corporations (including financially stretched sub-investment grade corporations), and small businesses are much more cash rich than they were prior to the pandemic.

“Across corporates and small business, cash holdings that could be used to fund future capex and hiring — or to cushion against future shocks — have risen by 3pp as a share of GDP,” wrote Goldman Sachs economists Spencer Hill and Manuel Abecasis.

Let’s delve into this topic a bit more.