(Kitco News) - Recession fears on Wall Street are starting to subside as major banks update their economic forecasts heading into the second half of the year; however, there is growing financial stress among Main Street consumers.
On Tuesday, LegalShield, a legal services company that provides Americans with access to legal advice, counsel, protection, and representation, released its monthly Consumer Stress Legal Index (CSLI). The company said its index rose 5.8 points in July to 67.6, the highest reading since November 2020 and the highest single-month increase in over two decades.
The index was released one day after Goldman Sachs cut its probability forecast for a U.S. recession to 20% from 25%.
“The picture isn't as rosy as what the macro-level indicators would lead us to believe,” said Matt Layton, LegalShield's Senior Vice President of Consumer Analytics, in an interview with Kitco News. “We're certainly not in the business of predicting [recessions], but what we can say is that there has been an accumulation of [financial] stress over the last several years. The July surge tells a story of a kitchen table economy that contrasts with key positive macro indicators, including falling producer and consumer inflation and a stock market trading at near record highs.”
LegalShield’s CSLI is based on a dataset of more than 35 million consumer requests for legal assistance since 2002. The index is built on three sub-indices tracking calls for legal assistance related to bankruptcy, foreclosure, and consumer finance.
Looking at the components of the broader index, the bankruptcy subindex increased by 6.1 points to 35.6, posting its highest level since February 2020, and the largest single-month increase since July of that year. At the same time, the foreclosure subindex rose by 6.0 points to 42.3, the largest month-over-month increase since November 2020 and its highest level since last December.
Although consumer economic stress levels are still well below the highs seen during the 2008 Great Financial Crisis, Layton said that the rate of increase is a major concern. He added that preliminary data shows that July’s increase is not going to be an anomaly.
“Early August data that we're seeing shows consumer stress consistent with the levels that we reported in July,” he said.
While Wall Street recession fears have receded with expectations that the Federal Reserve will start to cut interest rates in September, Layton said that he doesn’t expect that to have the same impact on average consumers.
Layton noted that while inflation pressures have come down from their 2022 highs, prices are still going up, just not at a faster rate.
“There’s a compounding effect over several years of that higher inflation that is really beginning to show in our data,” Layton said. “I do think down the road, a rate cut will have a positive impact on the financial stress that we're reporting in our index. But again, a lot of things are going to have to flow through the system until that rate cut gets down to the everyday person living their life and paying their bills.”
The rise in consumer financial stress might not bode well for the gold market as prices hover around record highs above $2,500 an ounce. Data from LegalShield shows a negative correlation between high-stress levels and the gold price.
This view fits with analysts’ opinions. Although gold is a major safe-haven asset, it can still struggle in the early throes of a recession as investors sell the liquid asset to raise capital.
Rising consumer stress is also impacting the U.S. political landscape. Layton noted that data from LegalShield shows that the Republican Party is favored in battleground states when consumer financial stress is higher than the national average. When stress levels are below the national average, the Democratic Party is favored.
After sitting 5.0 points below the national average in June, the CSLI in battleground states – including Arizona, Georgia, Michigan, Nevada, North Carolina, Pennsylvania, and Wisconsin – rose 10.5 points to 67.3, 0.3 points shy of the national average.
“July marked the largest stress increase in battleground states since we started tallying the data more than 22 years ago,” said Layton. “Our data doesn’t rely on feelings about who is in office, who is running for office, or who may win in November. The legal needs of everyday Americans, based on their outreach to our provider attorneys, track with voting behavior in the past five elections.”
