Why Americans Claiming the Economy Is Bad Are Spending So Much
It is the best of times and the worst of times. Consumers are paying more for essentials - and resent it - but many are cushioned by the low interest mortgages they locked in years ago just as their investment portfolios are booming.
The result is negative feelings about the economy exacerbated by media press coverage but offset by a still strong job market and relative financial well-being for middle and wealthy citizens. JL
Nicole Narea reports in Vox:
People feel really negatively about the economy, and that’s not stopping them from spending. The rich feel rich and account for a large share of
overall spending. households in the top 20% of incomeearning at least $244,025cushioned from economic headwinds, are flush with cash to spend. The middle class feels a little better off too, and
likely still has some savings built up they can burn through. Many high-income consumers locked in low interest rates on their mortgages and have seen their investment portfolios balloon in the last year. "Excess savings [are] still sloshing through the system."(But) Low and moderate-income consumers are increasingly weighed down by credit card debt
Americans have beenpessimisticabout theeconomyfor years. Weirdly, that’s seemed to have little impact on their willingness to open their wallets.
That was all supposed to come crashing down at some point. For more than a year, economists warned about the “death of the consumer” and a resulting recession — neither of which have materialized. Consumers were expected to retreat as inflation skyrocketed, hitting a9.1 percent peak in June 2022and remaining stubbornly above the Federal Reserve’s target rate of 2 percent.
There is a sign that Americans’ shopping spree might be finally coming to an end: Retail spendingstayed the samein April as compared to the previous month, falling short of analyst projections for growth.
However, those numbers don’t capture spending on services — for example,health care,transportation, and insurance — which has increased markedly this year. And bothPreston Caldwell, a senior US economist at Morningstar, andScott Hoyt, a Moody’s Analytics economist, said those numbers could easily bounce back next month, even if they’re expecting spending to cool by the end of the year.
“I am anticipating that we do see eventually a consumer slowdown over the course of this year,” Caldwell said. “It’s premature to say that that’s already playing out right now.”
Two things are simultaneously true: People feel really negatively about the economy, and that’s not stopping them from spending. In May, the University of Michigan recorded its lowest consumer sentiment reading in six months — an index of 67.4 out of 100 — as part of itslong-running survey.
That’s up from this time last year, but still well belowpre-pandemic consumer sentiment readings, which hovered in the upper 80s and 90s. The trend in sentiment was widespread across demographic lines: Consumers “expressed worries that inflation, unemployment and interest rates may all be moving in an unfavorable direction in the year ahead,” the University of Michigan report reads.
It’s hard to reconcile that with high spending figures. But in short, the rich currently feel rich and account for a large share of overall spending. The middle class feels a little better off too, and likely still has some savings built up they can burn through. They might not yet have felt the pressure of high interest rates and inflation to the same degree as people who rent and have fewer investments. (But that’s due to change.)
High-income consumers — households in the top 20 percent of incomeearning at least $244,025before taxes as of 2022 — have been largely cushioned from economic headwinds and are flush with cash to spend.
The pandemic saw Americans’ average percentage of income saved increase toan all-time high of 32 percentin April 2020 after many households received stimulus checks. That has helped fuel spending, but unlike inother high-income countrieswhere consumers have proved more thrifty, Americans are close to depleting those savings.
“The excess savings [are] still kind of sloshing their way through the system. Depending on how you estimate excess savings, they will be depleted sometime in the middle of 2024 or maybe by as late as mid-2025,” Caldwell said.
Many high-income consumers also locked in low interest rates on their mortgages before the Federal Reserve started raising rates in March 2022, and they’re seeing their home values continue to go up nonetheless. The average US home priceincreasedfrom $287,000 in 2019 to $450,000 in 2024. This is in part due to persistent low inventory: High interest rates have kept would-be sellers on the sidelines because their mortgage payments would be higher if they bought a new place.
High-income consumers have also seen their investment portfolios balloon in the last year. Thestock marketrepeatedly tested new highs in recent months, with thelatest record set on Thursdayin the wake of new data showing that inflation is slowing. And wealthy older Americans who allocate more of their portfolios to government bonds arebenefiting from higher interest rates.
“That sort of gives consumers an incentive to spend out of their newfound wealth,” Hoyt said. “And since this set of consumers still has excess savings left over from the pandemic, that gives them the easy, relatively liquid monies to do so.”
The question is how long the stock market can sustain this run. Some analysts think stocks are currently overpriced and due for a correction — which might cause some people to finally close their wallets.
“Equity prices are starting to move more into arguably overvalued territory,” Caldwell said. “So that’s probably not going to be a tailwind [for spending] over the next year.”
At the same time, the factors currently fueling spending at the highest income levels aren’t universal. Not all consumers can afford to spend more.
Even though inflation has come down significantly from its 2022 peak, low-income Americans arestruggling with higher prices. Consumers in general say they are budgetingmore on everyday essentialslike fresh produce and baby supplies.
Among people living paycheck to paycheck, pandemic savings (if they ever really had any) might be long gone.
Low and moderate-income consumers are also increasingly weighed down by credit card debt and struggling to pay it down due to high interest rates, which research suggests could be amajor contributorto overall economic pessimism.
Though credit card debt levels dipped during the pandemic, they are now returning to pre-pandemic levels, with the average balance per consumer increasing by8.5 percent in the last year to $6,218.More than halfof people earning less than $25,000 carry a balance on their credit cards.
Their only consolation is that the job market remains strong, meaning they might be able to count on another paycheck — but even that might not last. Analysts including Caldwell expect the unemployment rate to rise from 3.8 percent to 3.9 percent and wage growth to slow in 2024.
Ultimately, however, low-income consumers “just don’t account for that big of a share of total spending,” Hoyt said. “It’s the high end of the income distribution that accounts for a disproportionate share of the spending.”
1 comments:
Anonymous
said...
Man, you guys are gonna get creamed in November. Telling yourself that you know the lives of American voters better than they do is some serious copium.
Government statistics aren't reality. They are the hyperreality of a dying culture.
As a Partner and Co-Founder of Predictiv and PredictivAsia, Jon specializes in management performance and organizational effectiveness for both domestic and international clients. He is an editor and author whose works include Invisible Advantage: How Intangilbles are Driving Business Performance. Learn more...
1 comments:
Man, you guys are gonna get creamed in November. Telling yourself that you know the lives of American voters better than they do is some serious copium.
Government statistics aren't reality. They are the hyperreality of a dying culture.
Post a Comment