Unveiling the Wealth Effect: The Unseen Engine Behind Resilient Consumer Spending Amid Rising Interest Rates
In the unfolding tapestry of our economic narrative, consumer spending stands as a resilient pillar, continually defying the forecasts of economists amidst the highest interest rates witnessed since 2007. Although a robust job market has played its part in bolstering buyers' confidence, there lies a critical underpinning often bypassed in discussions—the burgeoning net worth of American households. The span between 2019 and 2022 saw a remarkable 37% surge in household net worth, propelled by escalating housing and equity portfolio values as delineated in the recent Survey of Consumer Finances. This upward trajectory elevated the US household median net worth to a notable $192,000 by the close of 2022, a substantial leap from the $141,000 recorded three years prior.
The Fed’s triennial Survey of Consumer Finances illuminated the most significant wealth augmentation in its recorded history. This affluent stride was undergirded by two pivotal factors: the benevolent federal stimulus payments and a pandemic-induced spending deceleration, which collectively afforded households the latitude to amass savings and reduce debt. The resultant high cash balances have not only underpinned steadfast spending but also retained a firm grip on the labor market, averting the recession many prognosticated for this year. It's a testament to how demographic and wealth transitions potentially morph the traditional economic cycle management into a more complex endeavor.
A Glimpse into the Wealth Effect through September's Housing Market Dynamics:
The housing market in September revealed a robust 12.3% surge in new single-family home sales, reaching a 0.759 million annual rate and effortlessly surpassing the anticipated 0.680 million. This remarkable growth, witnessed across all major regions, reflects a 33.9% increment from the previous year.
Noteworthy points include:
A decline in the months' supply of new homes from 7.7 in August to 6.9 in September, driven by a brisker sales pace.
The median price of new homes sold was $418,800, a 12.3% decrease from a year ago, providing a glimpse of affordability amidst rising mortgage rates.
This scenario heralded a notable monthly gain, showcasing an upward trend in sales, albeit still trailing the zenith reached during the pandemic epoch of 2020. The dynamics underscore a broader palette of options for potential buyers, yet with the caveat of affordability still looming large.
The narrative woven by these dynamics underscores the palpable Wealth Effect and its intricate interplay with consumer spending patterns amidst the evolving economic landscape.
Consumer Balance Sheets Chart
Despite the inklings of diminishing household cash balances ushering an uptick in credit card usage, the enduring vigor of consumer spending remains undeterred. The Retail Sales Report of the previous month underscores this tenacity with a 0.7% rise in retail sales, surpassing the anticipated 0.3%, painting a portrait of a consumer base undaunted by the recent inflationary ripples. This burgeoning sales activity has maintained an upward curve since April, epitomizing the US as a quintessential consumption-based economy, where personal spending embodies two-thirds of our nation's economic growth.
Adjusted Retail & Food Services Sales SA Total Monthly % Change Chart
In a bid to stifle inflation, the Federal Reserve has embarked on a mission to orchestrate a cyclical slowdown by amplifying borrowing costs. However, high-income earners and our senior citizens remain nestled in an economic bulwark, relatively impervious to these economic whims. The uppermost quintile of income among American households, earning over $180,000 annually, represents nearly half of all income accrued and accounts for over one-third of spending.
2022 US Income and Spending Breakdown by Quintile Chart
Our senior populace has emerged as a pivotal propellant of consumer spending, courtesy of their demographic size, financial robustness, and spending predilections. Now standing at a historical zenith, 17.7% of the US population is aged 65 and above, and their spending propensity has soared to an unprecedented 22% of the nation's total spending. The Baby Boomer cohort, presently aged between 57 to 75, has reaped the benefits of the central bank's zero interest rate policy in yesteryears, a boon to the valuations of their homes and stock portfolios. As we tread into the era of interest rate normalization, they transition into income-earning assets, poised to reap further benefits.
Household Net Worth by Age ($000s) Chart
Seniors exhibit a lesser susceptibility to interest rate shifts compared to other household segments, courtesy of their minimal to nil debt burdens. Moreover, the 8.7% Social Security payout amplification this year has further buoyed their financial muscle, rendering them less influenced by unemployment and job market fluctuations given their largely retired status. Traditional monetary policy may find its efficacy in curtailing senior spending diminished compared to the 1990s and 2000s era when Baby Boomers were active in the workforce. Much like their high-income counterparts, senior spending habits are energized by the wealth effect, the amalgamated growth in housing and equity value. It's plausible that only a significant retraction in housing or the equity market could tether the senior spending spree.
Bottom Line: The Federal Reserve, rooted in classic economic cycle paradigms, foresees a scenario where a blend of slowed growth and escalated unemployment could stifle spending and tame inflation. Yet, we envisage a diverging narrative in this chapter. Our esteemed seniors, alongside select prosperous households, shielded from the whims of economic cycles, interest rates, and job market undulations, stand on the verge of maintaining their spending momentum. This could potentially catalyze an unexpected surge in prices. The unwavering demand from seniors and affluent households may fan the flames of persistent inflation, paving the way for a more pronounced recession, one that could coax a decline in housing prices and equity values to temper demand. Although we notice a gentle trajectory of inflation aligning with the Fed's two per cent target, the ghost of “higher-for-longer” interest rates casts a long shadow, beckoning a wise and foresighted preparation from investors. This juncture calls for a robust strategy, armed with insightful knowledge, to not only navigate but thrive amidst these unfolding economic narratives. Our quest for financial wisdom is not a mere flight of fancy, but a grounded endeavor to safeguard and burgeon our wealth in the face of evolving economic winds.
With a heart full of fiduciary responsibility and armed with over two decades of financial planning expertise, coupled with an illustrious 15-year corporate executive journey, I am here to navigate these economic tides with you. Together, we shall embark on a voyage to not just preserve but enhance your wealth amidst these evolving economic landscapes. The sentiment of "Knowledge is Power" rings ever true in these scenarios. The more informed we are, the better positioned we become to make judicious financial decisions that resonate with our long-term goals and aspirations.
In the grand tapestry of financial stewardship, every thread of knowledge we weave today paves the way for a secure, prosperous tomorrow. It’s not just about weathering the storm, but learning to dance in the rain. As the adage by Benjamin Franklin goes, "An investment in knowledge pays the best interest." Let's continue to invest in this invaluable resource, standing shoulder to shoulder, as we traverse the path of financial self-actualization.
Wishing you a bounty of financial serenity and prosperity,
Tony Gomes
Content Disclosure: The insights shared herein are primarily for educational enrichment and not a substitute for professional accounting, legal, tax, insurance, or investment counsel. While the information is deemed accurate and reliable, its completeness or precision is not guaranteed. Discussions may encompass forecasts, opinions, or economic, market, or investment strategy scenarios, all subject to change. Always consult a qualified expert to address your unique situation and stay abreast of current applicable laws and rules.
