Column-Record US household wealth may increase chances of soft landing: McGeever By Reuters

By Jamie McGeever

ORLANDO, Fla. (Reuters) – As the Fed prepares to cut interest rates, U.S. households are banking on the largest accumulation of net worth in history. By some financial measures, American consumers are better off than they have been in decades.

That financial cushion could increase the likelihood that the economy’s descent will be more of a slide than a crash. And it suggests that the takeoff of the economy and markets ahead could be faster and steeper than in previous cycles.

Figures from the Federal Reserve last week showed gains in home prices and the stock market boosted household net worth in the second quarter by $2.8 trillion to a record $163.8 trillion. Overall, household net worth has increased by nearly $47.0 trillion since its pre-pandemic peak less than five years ago.

A closer look at the numbers behind the latest headline numbers point to even stronger fundamentals.

Net wealth as a share of disposable personal income – a broad, relative measure of the financial well-being of the household sector – rose to 785%, the highest point in two years, while household debt as a share of GDP fell to 71% , the lowest level in the last 23 years.

Even though credit card and other forms of delinquency are on the rise, most households are not facing large debt loads.

In short, US households as a whole have generally had little trouble weathering the Fed’s 525 basis points of rate hikes between March 2022 and July 2023.

“While it is popular to focus on the demise of American society and the US economy, the reality is that American households have never been richer, and the level and growth of net worth still far outstrips any other economy globally,” Lazard (NYSE: ), Ronald Temple, chief market strategist, wrote on Friday.

FOCUSED ON THE VERSE

But even if this rosy picture holds true, not everyone benefits equally. In the US, 25% of assets are owned by 1% of the population and nearly 80% are owned by the 20%, meaning that rising house and stock prices have benefited a relatively small cohort of the population.

The lagged impact of several years of negative real wage growth and the dampening of pandemic-related stimulus is beginning to show. The national savings rate fell to 2.9% in July, approaching the historic lows recorded in the 2005-2007 period leading up to the Great Financial Crisis.

Many households can no longer rely on excess savings and may be reluctant to borrow to finance future spending. Does this mean consumption will soon crater?

Probably not. For better or worse, the consumer spending engine that drives the US economy is fueled by the wealthy. Economists at BNP Paribas (OTC: ) estimate that the top 20% of income earners account for nearly 40% of total spending, and the richest 40% account for more than 60% of all spending.

In fact, rising stock and house prices — which, again, benefit only a fraction of the population — are expected to boost consumer spending this year by $246 billion, according to estimates by BNP Paribas economists earlier this year. That would be the third biggest boost to US consumer demand in 25 years, adding about 1 percentage point to GDP growth in 2024.

“Ultimately, it is the labor market that will matter much more for a larger share of households, and overall there are no significant signs of stress,” says BNP Paribas senior US economist Andrew Husby.

Economists at Goldman Sachs believe that consumers’ personal disposable income is actually understated by nearly $400 billion. If so, the savings rate is estimated at 5.2%, suggesting downside risks to spending are more limited than previously thought.

HOW GOOD IS IT?

History shows that, unsurprisingly, Wall Street tends to do well after the Fed starts cutting rates. While the record is slightly mixed, U.S. stocks are on average headed higher in the year after the Fed’s easing cycle ends, and typically rise by as much as 20% in the absence of a recession, according to analysts at Raymond James.

Spending—and therefore corporate earnings—could obviously slow sharply if the labor market soured. But that’s not most people’s base case. Even if that were to happen, the Fed’s response would likely be a reasonably solid shield for financial markets.

Consider that markets are currently pricing in 250 basis points of rate cuts between now and the end of next year — and that’s with the expectation that there won’t be a severe recession. If there is, markets could get even more help from the Fed.

So even as economic turmoil stresses consumers, households appear to be in as strong a position as they could hope for, meaning they – and markets – are relatively well-positioned to weather these potential headwinds.

(The opinions expressed here are those of the author, a Reuters columnist.)

(By Jamie McGeever; Editing by Leslie Adler)