|
Households and non-profit organisations owned liquid assets
worth $18.5 trillion at the end of March 2022 up from $14.3
trillion at the end of March 2019, after adjusting for
inflation, data from the Federal Reserve showed.
Liquid assets include currency as well as balances in checking
accounts, time deposit accounts and money market funds, all of
which are readily available to spend (“Flow of funds accounts of
the United States”, June 9).
Liquid assets accumulated at a record rate in 2020 and 2021
because of pandemic-enforced restrictions on travel and social
spending as well as the stimulus payments made by the federal
government.
During the most intense periods of lockdown in the second
quarter of 2020 and the first quarter of 2021, households were
saving at annualised rates of $4-$5 trillion.
More recently, however, the inflation-adjusted value of liquid
assets has been flat or falling as households have been able to
travel and socialise again while rising prices have cut the real
value of balances.
In real terms, liquid assets at the end of the first quarter of
2022 were down slightly from $18.7 trillion at the end of the
first quarter of 2021 (https://tmsnrt.rs/3o2lLRn).
Real balances are likely to fallen much more sharply since then
as most of the remaining travel restrictions have been lifted
while inflation has surged.
The fact that households’ real liquid assets are high but
falling fast explains why current spending remains strong but
consumers and voters say inflation is their top concern and the
economy is on the wrong track.
The resilience of consumer spending in the face of rapidly
escalating food, fuel and other bills will depend on whether
households focus on the level of their real liquid assets (high)
or the rate of change (falling fast).
It also depends how long rapid inflation is expected to persist
and continue eroding the value of their existing savings and
ability to add to them.
SENTIMENT AT RECORD LOW
Consumers expect prices to rise at annualised rates of 5.2% over
the next year and 2.8% over the next five years, both much
faster than the central bank’s target (“Survey of consumers”,
University of Michigan, July 15).
The proportion of households saying they are better off
financially than a year before dropped to 37% in May 2022 from
42% in May 2021, while the proportion saying they are worse off
leapt to 46% from 22%.
Among respondents who said they were worse off, the most
commonly cited reason was higher prices (38%) and this was true
for those in the lowest third of the income distribution (39%)
as well as the top third (33%).
More respondents said higher prices were making them worse off
(38%) than that higher income was making them better off (34%).
For respondents in the bottom third of the income distribution,
the gap was even wider, with far more citing higher prices for
making them worse off (39%) than citing higher incomes for
making them better off (25%).
Reflecting the impact of inflation, the consumer sentiment index
fell to a record low in June (50.0), worse than during the
financial crisis in 2008 (55.3), the recession in 1980 (51.7) or
the aftermath of the oil shock in 1975 (57.6).
There has been only a slight improvement in the first part of
July, with preliminary results showing the sentiment index
increasing marginally to 51.1.
CONTINUING TO SPEND, OR NOT?
Households still have the financial resources to continue
spending for the next year or more by running down the savings
that they built up during the pandemic.
But this is an aggregate and it is likely many households in the
lower part of the income distribution are already exhausting
their reserves and becoming spending-constrained.
Crucially, household and business narratives and psychology
around spending already show many of the traits associated with
the onset of a recession (“Narrative economics”, Shiller, 2017).
There are already anecdote-based news reports of households
trading down to cheaper brands, limiting weekly spending on food
and gasoline, and postponing non-essential spending.
Businesses in many sectors have begun to pare back hiring,
consider reducing headcount, and pause capital investment.
Persuading households to continue spending depends on convincing
them growth will continue and that inflation will be brought
under control to stem the erosion in their financial position.
Running down savings is psychologically unpleasant when it is
associated with rising prices and costs rather than increased
consumption, which explains the sour mood picked up in surveys.
Households are already starting to push back; they may not be
able to do much about rising prices as consumers but as voters
they can punish those they hold responsible.
Related columns:
- Global business cycle starts to turn down (Reuters, June 30)
- Global consumers balk at surging prices for durable goods
(Reuters, April 26)
- Escalating U.S. inflation forces macro policy rethink
(Reuters, Jan. 13)
- Global economy faces biggest headwind from inflation (Reuters,
Oct. 14)
John Kemp is a Reuters market analyst. The views expressed are
his own
(Editing by Barbara Lewis)
[© 2022 Thomson Reuters. All rights
reserved.]
This material may not be published,
broadcast, rewritten or redistributed.
Thompson Reuters is solely responsible for this content.
|
|
