Four Reasons Why an Economic Contraction is Inevitable
Here’s a reason to celebrate…With record high stock market and housing
valuations, average American net worths are at an all-time high!
At the risk of sounding like the one person yelling “turn that music down!” at a roaring party, here are four consumer-centric reasons why existing net worths are inflated, and why we are starting to hear sirens approaching:
Debt- Credit card balances currently stand at all time highs (totaling $1.13T per the Federal Reserve). On top of that, average credit card interest rates are at levels not seen since the Federal Reserve began collecting data in 1994. Let that sink in for a second- Record breaking credit card balances compounding at record breaking interest rates.
Borrowing against 401k balances has also increased year-over-year, indicating that borrowers are tapping into long-term investments to satisfy their current (and past/financed) spending.
Illiquidity- The percentage of Americans currently living paycheck to paycheck is striking, including 60% of earners making six figures or more, and almost 80% of the population as a whole. With record consumer debt levels compounding at a rate of interest this generation of consumers hasn’t yet seen, most of the population has limited cash on hand to service their debt burdens.
Scared yet? Let’s keep going…
Real Wages– Although real wages have started to outpace inflation since May 2023, a zoomed-out view shows that CPI increases have significantly overtaken any (total) real wage increases that have occurred since the onset of the pandemic. As such, economists anticipate that current trends (in real wages surpassing CPI increases) must continue through 2024 before earnings fully catch up to the price increases that have occurred since 2019.
Inflation Stickiness- In November 2023, Target CEO Brian Cornell noted that, over the past few years, food, beverage and household essentials inflation was up 25 to 30%; specifically citing baby formula prices increases of 30% during that time.
Obviously, these goods are not discretionary in nature, leaving already strapped consumers to accept severe price increases (if they are able).
With the consumer base weakened, it’s a matter of time before corporate earnings are adversely impacted; and a cascading effect of lower investment/retirement account balances, housing prices, and net worths begin to unfold.
For everyone’s sake (especially the most financially vulnerable), let’s hope I’m wrong.