Remember when everyday Americans had too much money?
No? Me neither. And I can explain our shared amnesia.
We can’t remember the halcyon days when most households were financially secure because those days never existed. Not during the pandemic fiscal splurge and not at any other point in the nation’s (short) history either.
America is (easily) the richest nation the world has ever known. Despite that, average people don’t have much. In fact, if you have anything at all, you’re in the minority.
A study conducted by Bankrate last month found that just four in 10 Americans could fund a $1,000 emergency with their savings. Believe it or not, that was actually a very good result. In eight years of polling, the highest reading ever recorded was 41%. January’s 44% thus counted as a stellar read on Americans’ capacity to absorb an emergency.
“While the ability to cover an unplanned $1,000 expense from savings is the best we’ve seen over the past eight years, the majority of Americans still cannot afford to do so,” Bankrate’s chief financial analyst Greg McBride said, noting that “the reliance on borrowing is still high, with more than one-third of households having to turn to a credit card, personal loan or family and friends in the face of unplanned expenses.”
And here I thought “households” were $34 trillion richer post-pandemic.
The point isn’t to deliver yet another lamentation on inequality and our new Belle Époque (sans rentiers, sub super-managers). Rather, I wanted to highlight the figure (below) from Goldman which (unfortunately) shows that real disposable personal income is now likely below the pre-pandemic trend, a remarkable turn of events considering how far above trend it was for the entirety of the recovery.
Note where the red and green lines cross. That’s not a coincidence. That’s the Manchin epoch. Note also that increases in labor income aren’t projected to be sufficient to make up the difference.
“Fiscal support boosted real disposable income to 5% above the pre-pandemic trend on average in 2021, but disposable income had faded to trend by the end of the year,” Goldman’s Ronnie Walker wrote, in a note out earlier this week. “Following the lapse of the expanded child tax credit this month, we estimate that disposable income has now dipped below trend and will remain an average of 1% below the pre-pandemic trend in 2022, even after penciling in strong gains in labor income.”
What does that mean for the economy? Well, it probably means less consumer spending. Recall that although Q4 GDP came in well ahead of consensus in the advance read out last Thursday, the beat came courtesy of inventories. Consumption was just in-line.
The following day, December PCE data showed real personal spending was negative for a second month. Real disposable personal income notched a fifth consecutive monthly decline. With consumption waning, it’s possible the US economy will contract in Q1. Indeed, Goldman revised their Q1 forecast this week. The bank now sees annualized real GDP growth of just 0.5% this quarter, down markedly from the 2% rate they expected previously.
Although Goldman (and pretty much everyone else) expects Q2 and Q3 to make up for any fleeting weakness, some of those assumptions are based on the notion that Americans are sitting on a pile of “extra” cash.
The decline in disposable income “should weigh on consumer spending — and is a large part of why we expect growth to slow to only slightly above potential by the end of the year — but the impact should be cushioned by spending of excess savings built up during the pandemic that still total nearly $2.5 trillion,” Goldman’s Walker went on to write.
It’s not that I doubt Americans, as a collective, have excess savings. The numbers are just the numbers. There’s quite a bit sitting in deposits and money market funds (figure above).
What I doubt is the notion that the people most inclined to spend incremental dollars have a lot of dollars to spend. There’s something tautological about this. An economy driven by consumer spending is, generally speaking, an economy driven by those with the highest marginal propensity to consume. Those consumers don’t have a lot of excess savings, almost by definition. Extra dollars are spent immediately.
Asked on Tuesday about Joe Biden’s Build Back Better plan, which, of course, would’ve bolstered household incomes, Joe Manchin said simply, “What Build Back Better bill? It’s dead.”
Cheer up folks! Think of the rising incomes for lawn service workers in the Hamptons or on Marco who are charging ever higher prices for “prime cut” scheduling! Private jet businesses! Jet copters! All rolling in money as those excess savings get run down!
“We’re Happy as Clams, by a sewer pipe!”
The NBER recently released a report on the PPP program titled: “The $800 Billion Paycheck Protection Program: Where Did the Money Go and Why Did it Go There?
This is the main takeaway from the abstract: “The Paycheck Protection Program (PPP) provided small businesses with roughly $800 billion dollars in uncollateralized, low-interest loans during the pandemic, almost all of which will be forgiven. With 93 percent of small businesses ultimately receiving one or more loans, the PPP nearly saturated its market in just two months. We estimate that the program cumulatively preserved between 2 and 3 million job-years of employment over 14 months at a cost of $170K to $257K per job-year retained. These estimates imply that only 23 to 34 percent of PPP dollars went directly to workers who would otherwise have lost jobs; the balance flowed to business owners and shareholders, including creditors and suppliers of PPP-receiving firms. Program incidence was highly regressive, with about three-quarters of PPP funds accruing to the top quintile of households.”
Yup. It was entirely predictable.
https://osam.com/Commentary/upside-down-markets
Self-righteous bureaucrats and politicians have been forcing single mothers to use chipped debit cards for sometime now to enforce strict control over how, where, and on what they can spend public largesse on for their children. But, the PPP by definition will be going to millions single white males. So better just deposit money directly into their bank accounts with zero strings attached and forget about accountability. Put the money one mouse click away from buying bitcoin, SPACs, video game trinkets, …, or what-the-f*ck ever!
The whole thing is so pathetic, for so many reasons, it isn’t worth going into. We are ‘led’ by idiots, by “captains not courageous”, by time-servers, by rent-seekers, by revolving-door regulators, ….
As I continuously post on this site, why in the world would anyone think this economy could stand 5-7 hikes in 2022? The supply chain situation is going to resolve itself- the resolution is going to prove especially painful to the bottom 70% of households. And it is not going to require nearly as many hikes or balance sheet run down as the street thinks. Look just my point of view, but lots of demand for goods have been pulled forward. And the market basket for consumption has shifted- but the market basket is likely to adjust back at least part way towards services and demand growth for durable goods is likely to diminish at some point in the near future. The FOMC and the Biden administration needs to be mindful of the tiger they are riding….. things can change rapidly
Secondly- the emergence of energy is a top performing sector typically indicates that the economy is late cycle- just saying- investors be careful out there…..no recession yet but the signs are starting to pop up……
All my homies hate Joe Manchin.
Joe M reps one of the poorest states, his daughter is loaded and his wife has a cushy job. I can’t see how he gets re-elected.
Look on the bright side: Joe Manchin is sitting on a pile of excess cash.
H-Man, nice job of confirming the American consumer may be going on a sabbatical and it may be a rather long sabbatical since there hasn’t been a shot fired yet by the Fed in the war on inflation. When the bullets start flying, i imagine consumers will be running to the bunkers which are filling up fast.