Stimulus Update: Consumers Are Starting to Cut Spending. Will That Lead to a Recession and Stimulus Round?

Consumers are feeling the crunch of inflation. Will economic conditions worsen?

Consumers struggled immensely in 2022 as inflation reared its ugly head. Many people, in fact, had no choice but to rack up credit card debt last year just to stay afloat.

But surprisingly, consumer spending was strong in 2022, despite soaring inflation. And that's a big reason lawmakers did not approve a round of stimulus aid in 2022.

The last time lawmakers sent out federal stimulus checks was March of 2021. Back then, unemployment was still high and the economy was in a much different place. But 2021's stimulus aid helped fuel a quick economic recovery, so much so that lawmakers simply couldn't justify another stimulus round in 2022, despite raging inflation.

But new data from the Federal Reserve Bank of New York shows that consumer spending is finally starting to slow down. And if that trend picks up, it could push the economy into a less stable place -- and potentially warrant a round of stimulus checks in 2023.

Consumers are starting to pull back

In December, monthly household spending growth fell to 7.7%, according to the Federal Reserve Bank of New York. That's considerably lower than August's 9% reading, which represents a recent peak.

Now to be clear, that 7.7% reading isn't alarmingly low. It's still well above pre-pandemic spending levels. But still, the data points to a notable pullback in spending, and higher interest rates are likely a big driver of that trend.

The Federal Reserve implemented a series of aggressive interest rate hikes in 2022 in an effort to slow the pace of inflation. That's made borrowing more expensive for consumers across the board, so it's easy to see why Americans are finally cutting their spending.

Also, many people gained buying power in 2022 due to the stimulus aid they received in 2021. But at this point, a lot of that money is no doubt gone, forcing consumers to cut back.

Will a decline in consumer spending fuel a recession?

It's certainly possible. In fact, the Fed's goal in raising interest rates is to get consumers to drop their spending just enough to cool inflation, but not so much to drive the economy into a recession. But that's a very delicate balance to strike. And if spending declines too much, we could have a broad economic downturn on our hands.

But will a recession, if one comes to be, lead to another stimulus round? That's not guaranteed either.

Things will need to get really bad for lawmakers to approve another round of stimulus checks -- especially since the last round was met with a fair degree of criticism. In fact, many financial experts have said that a big reason we got into trouble with inflation in 2022 is that lawmakers were so generous with their stimulus policies in 2021. So for another stimulus round to get approved in 2023, we'd need to see unemployment levels increase pretty drastically on a national level.

Right now, unemployment is pretty much at a 20-year low. So unless things take a sharp turn for the worse, a drop in consumer spending probably won't pave the way to a follow-up stimulus round. It may not even fuel a recession to begin with.