Household balance sheets are in good shape
– by New Deal democrat
One of my fundamentals-based systems for monitoring the economy is to look at the health of household balance sheets.
Most recessions happen when consumers are under stress. If real wages are growing, if assets that can be leveraged or cashed in (mortgage payments, home equity, stocks) are increasing in value, if monthly debt payments are not increasing, then there is no reason for consumers to pull back, and economic expansions continue. It is only when all of these conduits for spending are constricted that recessions typically occur.
And at present, households are generally in good shape. None of the avenues of spending power have been constricted.
To begin with, real hourly and weekly wages have been increasing steadily since their June 2022 lows:
Values in the above graphs are normed to 100 as of January 1973, the previous all time high for both series. There is also some immediate post-pandemic distortion due to the fact that the 2020 layoffs were heavily tilted towards lower income laborers. Thus the averages increased. Even so, real average hourly wages are presently at all time highs except for several months in spring 2020, while real weekly wages are at 2.5 year highs, and above all pre-pandemic levels except for 1973.
In terms of assets that can be cashed in or borrowed against, I’ll spare you the graphs, but suffice it to say that both real, inflation adjusted home prices, and stock prices, are at all time highs – the latter having made another such all-time high only yesterday.
Finally, here is the long-term historical look at mortgage, non-mortgage (left scale), and total (red, right scale) debt services payments of households as a percent of disposable income:
While these have risen through Q2 of this year, the last data available, along with the Fed’s interest rate hikes, they are at pre-pandemic average levels.
Here is a close-up of the last five years:
What is noteworthy in this zoomed in look is that total debt service payments as a percent of income stabilized once the Fed was done hiking rates. If a recession were in the offing, I would expect this ratio to be continuing to increase. What this tells me is that average households’ debt service payments are well in line, despite being higher than their immediate post-pandemic historic lows.
In summary, real household wages and asset values are in good shape. The Fed rate hikes did not overly stress their balance sheets. There is no evidence households have been reining in spending. There is every reason to believe that the economic expansion will continue in the next few months.
And yet, many voters, perhaps influenced by prices, are worried about the economy and may vote fr Trump (illogically) because of it.
Yep, economics in general and especially understanding of inflation involve considerable magical thinking even among economists much less the ordinary citizens that sit under the normal distribution bell curves for both income and knowledge. The deception of the stagflation myth floated by conservatives in the Global North that followed the oil shocks (c. 1973) created by the middle eastern majority nations of OPEC have stuck with us. Despite the reality of open economies, the quantity of money theory holds the voting public entranced although any relevant underlying analysis would restrict its usage to closed economies. Well that did not stop Milton Friedman nor did it stop Ronald Rayguns then and it will not stop MAGA-Trumpists now. It is not easy for the left to fight conservative misinformation because the donor class constituency (mostly in finance) of the liberal establishment is every bit as dependent upon the residual (i.e., from legacy of 1944 Bretton Woods and WW-II) exorbitant privilege of the US dollar as is the donor class constituency (lots of oil) of the conservative establishment. When the truth burns a hole in all pockets then pretty lies will be the salve. Both right and left feed at the troughs of big tech and securities trading.
@rc,
“Both right and left feed at the troughs of big tech and securities trading.”
As does the center. If you want to get ahead today, you have to be invested (not to be confused with gambling, e.g., day trading, bitcoin, fear metals).
@Joel,
Well, yeah although I chose to do so only by proxy. I became a bit left of mainstream left by the 7th grade and by my senior year in HS completely disgusted with what Keynes call the liquidity preference. So, in my mid-20’s I began to actively pursue a securely pensioned job which took me five years to land. Even that was changed to defined contribution plan in 2010, but my 1980 grandfather has still survived. I still believe a lot will eventually change because unsustainable systems will eventually crash, but not in our lifetime most likely.
@rc,
Pensions were not an option for my wife and me. Two thirds of my 403b with TIAA has been in fixed income, the rest in regular stocks. My wife’s 403b has been entirely in equities (“Social Choice”). Her investments have performed much better than mine.
@Joel,
My favorite passage from (Keynes) General Theory:
https://www.marxists.org/reference/subject/economics/keynes/general-theory/ch12.htm
John Maynard Keynes
The General Theory of Employment, Interest and Money
Chapter 12. The State of Long-Term Expectation…..
….Thus the professional investor is forced to concern himself with the anticipation of impending changes, in the news or in the atmosphere, of the kind by which experience shows that the mass psychology of the market is most influenced. This is the inevitable result of investment markets organised with a view to so-called “liquidity”. Of the maxims of orthodox finance none, surely, is more anti-social than the fetish of liquidity, the doctrine that it is a positive virtue on the part of investment institutions to concentrate their resources upon the holding of “liquid” securities. It forgets that there is no such thing as liquidity of investment for the community as a whole. The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelop our future. The actual, private object of the most skilled investment to-day is “to beat the gun”, as the Americans so well express it, to outwit the crowd, and to pass the bad, or depreciating, half-crown to the other fellow…..
@rc,
As a geneticist, my response is that success belongs not to the strongest nor the swiftest, but to the ones most adaptable to change. Change is the only real constant in life.
“The actual, private object of the most skilled investment to-day is “to beat the gun”, as the Americans so well express it, to outwit the crowd, and to pass the bad, or depreciating, half-crown to the other fellow…..”
That’s not investing, that’s gambling.
The only good thing about Trump is that the horror that he represents has resurrected some semblance of a progressive movement, albeit probably more pandering than substantial, within the liberal political establishment. In the RoW the term “liberal” refers to the small state minimal regulation ideology of libertarianism and it has come to also mean that same thing in the US although most self-identified liberals do not realize that. It does get confusing since many self-identified libertarians are actually conservatives.
@rc,
“In the RoW the term “liberal” refers to the small state minimal regulation ideology of libertarianism and it has come to also mean that same thing in the US although most self-identified liberals do not realize that.”
LOL!
“When I use a word,’ Humpty Dumpty said in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.”
~Lewis Carroll, Through the Looking Glass
Joel:
Thank you for the quote.