Stimulus Update: Have Leftover Stimulus Funds Been Helping Us Avoid a Recession?

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

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

But so far, we don't seem to be inching closer to a broad economic decline. And while consumer spending has declined in recent months, it's only done so to a modest degree, despite inflation. Leftover stimulus funds, however, could be the reason why.

Consumers might still have money in the bank

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

Given the way inflation surged last year, these dips are pretty modest. And even if this trend continues, it likely won't be enough to fuel a major recession in 2023.

But we could see consumer spending start to decline to more of an extreme this year for one very big reason, and it's not inflation. Rather, consumer spending might drop once leftover stimulus funds from 2021 run out.

In 2021, lawmakers were extremely generous with their stimulus policies. They approved a round of $1,400 checks that started hitting recipients' bank accounts in March that year. They also gave the Child Tax Credit a major boost, raising its maximum value from $2,000 per child to $3,000 per child aged 6 to 17 and $3,600 per child under age 6. Plus, the entire Child Tax Credit became fully refundable, so recipients with no tax liability could claim its value in full.

Some people needed the stimulus funds they received in 2021 to cover their near-term expenses as inflation levels began to rise. But a lot of people who received a payday from the government that year didn't need the money right away. So instead, they saved it. And in 2022, they had the option to keep on spending even as living costs soared.

But at this point, a lot of that stimulus money is apt to be running out. So while leftover stimulus funds may have helped us stave off a recession until now, things do have the potential to take a turn for the worse once that lifeline dries up.

It pays to prepare for a recession

A 2023 recession is far from a sure thing. But it's a good idea to prepare for one by boosting savings as much as possible. A recession could lead to widespread layoffs, and one of the best ways to cope with the loss of a job is to have cash reserves to fall back on.

Granted, if a recession strikes and the greater economic situation gets dire enough, lawmakers might be driven to issue a new round of stimulus funding. But in a more mild or moderate recession, that's less likely to happen. So rather than fall back on more stimulus aid, consumers should gear up for a recession individually by growing their savings.