I am intrigued and—admittedly—surprised by the robustness of American consumer spending. I understand that wage growth has been substantial, but inflation has risen even more. While nearly everyone in the U.S. has a job (or two or three), it hardly offsets the increased financial burdens.
The Covid stimulus measures were unprecedented, allowing the average American—referred to colloquially as “Joe Sixpack,” though he doesn’t actually exist—to have access to a massive amount of money to get through the lockdowns and high inflation. The accompanying chart by Tørsten Slok from Apollo Global Management, showing the rise of excess savings, explains this robustness quite well.
However, as the chart shows, the well of free savings is finally drying up. This means that the sharp rise in interest rates should start to take effect from now on.
For instance, the 30-year mortgage rate in the U.S. has surged to 7.6 percent, more than four percentage points higher than at the start of 2022. Granted, not everyone is immediately affected by this, especially if they continue to stay in their homes, leading to declining prices. But any American who needs to refinance—and that number will increase over time—is in trouble.
Credit card rates at 21%
Add to this the fact that credit card interest rates have risen by about 50 percent in recent years to 21 percent. Americans—and increasingly Europeans as well—are known for financing their shopping sprees with borrowed money. Don’t forget the sky-high interest rates on auto and student loans either.
For me, this signifies that postponement doesn’t mean cancellation. It’s nearly impossible for the Federal Reserve to orchestrate a soft landing without lowering short-term interest rates. Expect little help from the U.S. government, where the cost of borrowing is skyrocketing. No, when times get tough, the consumer is left to fend for themselves, without any aid from “Uncle Sam.”
Jeroen Blokland is the founder of True Insights, a platform that offers independent research to help diversify multi-asset portfolios. Blokland was most recently the head of multi-assets at Robeco. His “Chart of the Week” appears every Monday on Investment Officer Luxembourg.