Published December 1, 2023
Our subscribers know well that we publish quantitative, model-driven investment strategies that are not influenced in any way by economic data. We prefer this type of investment approach because it removes emotions from our investment decisions. Emotions are the most damaging force in investing. The article below, from the Stay-at-Home Macro blog, responds to the rather odd emotional landscape we find all too often over the past couple of years. A personal example is a conversation I had with a longtime neighbor and friend who was complaining about inflation. When I pointed out that he had actually benefitted handsomely from the same inflationary dislocations he was complaining about, he was surprised, if not downright disbelieving. His home value had gone up, easily, by over $100k while his expenses had maybe gone up by a very small fraction of that. Naturally, he was happy about his home value increase and still complained about the elevated spending. In somewhat the same vein, we know that people can “feel” inflationary spikes in gasoline prices while overlooking huge discounts (e.g. deflation) in computers, clothing, and other goods whose prices are less easily visible.
Here’s what Ms. Sahm sees from her research about what’s really going on (and not what we “feel” is going on):
“The majority of Americans are better off financially now than they were before the pandemic. Full stop. Not every American, but the majority. That’s true across demographic and income groups. It’s in the aggregate and individual-level data:
• Millions more good jobs.
• Bigger paychecks, even after inflation.
• Consumer spending back on a strong pre-Covid trend.
• Historic increases in wealth, including at the bottom.
• Lowest debt burdens on record.
It’s become a controversial view, and frankly, if you had asked me in April 2020—when unemployment hit almost 15%—that three and half years later, we would be in a better place than February 2020, I would have said no. But much has happened since then, and information that we now have from a wide range of families suggests that most got ahead; among them, some who had been falling behind for decades.
The jumping-off point for my post is a recent poll—another in an army of surveys—in which people tell us they are not doing better. That simply is not supported by the data.
Millions more good jobs.
It’s hard to know where to begin. There are so many examples of the gains in the labor market. If you want to know why people are holding up with higher prices and interest rates, better jobs and bigger paychecks are the key.
Before the pandemic, the unemployment rate had been below 4% for 13 consecutive months. As of October 2023, it has been there for 21 months. That is the longest stretch since the late-1960s. That is very good.
That I have had to defend the importance of a rock-bottom unemployment rate is mind-boggling. As I explained in an earlier post, it’s good for all workers:
A strong labor market gives workers bargaining power. Often that good news for workers is framed as bad news for the economy. The high rate of workers quitting and moving to better jobs is described as a sign of “overheating,” since companies must increase pay to hire. Even if wage gains aren’t keeping up with inflation, higher base pay matters. More money is good for workers and their families.
Americans have lived through multiple jobless recoveries before this one. This recovery has been a job-FULL recovery. Jobs were plentiful before the pandemic, and Covid put that financial security at risk. To come back better than before is remarkable.
Bigger paychecks, even after inflation.
Most Americans depend on their paychecks to pay the bills. When there’s inflation, those paychecks do not go as far. Of course, if the paycheck increases, people can keep up. They may be angry, but most can pay the bills.
Wages have caught up for most, and the biggest gains have been at the bottom.3 That positive turn of events hinges on this year, in which inflation decreased and median wages grew steadily. Any analysis that excludes 2023 is misleading.
But paychecks are not just about wages; they’re also about hours. Full-time work, usually better, rebounded more quickly than part-time work. That’s precisely the opposite of what happened after the Great Recession. Median inflation-adjusted weekly earnings for wage and salary workers in the third quarter are a touch above their level at the end of 2019. (Note, the spikes in earnings in the recession are a composition effect in which lower-earning workers are laid off most.) After the Great Recession, it was not until 2014 that the median real weekly earnings returned to their pre-recession level.
There is no sugarcoating it: the pandemic was highly disruptive. It turned lives and livelihoods upside down. More than a million Americans died from Covid, and millions more have long Covid. Putting the pieces back together has been painful, but there is also no denying the gains for most workers.
Consumer spending is back on track.
Being able to provide for one’s family is a central concern of most Americans. A sign of progress on that front is an increase in consumer spending after adjusting for inflation. Higher price tags, especially on necessities, are a burden for many. But at the end of the day, it’s the amount of actual goods and services we can buy that matter.
The news on consumer spending in this recovery is excellent. The gains have far outpaced inflation. Real consumer spending is nearly back on its pre-Covid trend. It took several years after the Great Recession—the biggest indictment of both parties’ fiscal response then.
Aggregate numbers can mask the experiences across different groups of households. However, the distribution of consumption is more equal than that of income or wealth. (Note: The exact estimates in the research vary.) Plus, the gains in consumer spending since the pandemic began are sizeable, making it unlikely that only the wealthy benefited. Please also remember that a family of four (except those in the top 20% by income) received $11,400 in stimulus checks during the first year of the pandemic, which is almost 20% of median family income. As already noted, lower-wage workers saw the largest wage gains.
The composition of spending was also different this time, which has implications for financial well-being. Durable goods are longer lasting. We drive a car off the lot and for years after that. Whereas when we go to a restaurant, which services spending, we only eat our meal once. An extremely unusual, pandemic-induced shift in our spending was from services to goods. Services remain the largest type of spending, but durables goods spending shot up. The downside was the upward pressure on inflation; the upside is that those items continue to support our economic well-being.
Some will say that the gains in spending are overwhelmed by peoples’ fears that the spending will end soon. Economic insecurity is the cause of concern. Given all the improvements in family finances, it’s hard to see how there is more economic insecurity now than before the pandemic.
But recession fears have been—and continue to be—shoved down our throats for almost two years. I have been pushing back with facts and common sense the entire time, and I have been right. Good.
Historic gains in wealth, including at the bottom.
The labor market recovery has been excellent, and the gains in wealth are stunning. The median family wealth, adjusted for inflation, jumped 37% from 2019 to 2022. (The median means that at least 50% or most families had a 37% gain.) That is the largest increase since the survey began in 1989, over double the next-largest increase.
Most impressively, the historic gains in real median family wealth are shared across all demographic and economic groups, including income.
Americans who have never had a financial cushion have one now. That is no accident. It takes a living wage to save, and there are higher wages now. And the massive amount of fiscal relief, including stimulus checks and larger jobless benefits, protected people from the disruptions of the pandemic, including higher inflation.
There is a cottage industry in estimating how much “excess savings” Americans have. While I don’t like the term “excess,” it is clear that most people have more savings than we would have expected before the pandemic. Yes, inflation is causing some to draw their financial cushion down, yet most Americans had a cushion to draw on, which was not the case for millions before the pandemic.
Lowest debt burdens on record.
Debt hitting record highs is the most common pushback I receive to my argument, other than inflation. And the dollars of credit are highest now.
I can’t blame the average person for buying into the debt doomsaying. That’s the message everywhere you turn (never mind that the level of debt tends to trend higher most of the time, as a by-product of increasing wealth). Outside of stimulus checks, I could not find coverage of the quarter-after-quarter disposable income that hit new highs. Debt numbers blasted out without context of income and are misleading. Taking debt relative to income or wealth shows good news, not bad.
The rising delinquencies are something to watch. However, delinquency rates fell in the Covid recession, and while balances in serious delinquency are rising, they are below pre-pandemic levels.
Transitions into 30-day and 90-day delinquencies are, in some categories, at or a touch above pre-pandemic levels. However, it’s worth remembering that interest rates due to the Fed’s rate hikes are considerably higher now. Now, aggregates could be masking the credit burdens for the typical (median) household. The news is even better if we look at households’ debt:
All three ratios [leverage ratios, debt-to-income ratios, and payment-to-income ratios], both in aggregate and as a median for debtors, decreased between 2019 and 2022, implying families faced lower debt burdens after relatively broad-based increases across measures from 2016 to 2019. In 2022, the median leverage ratio for debtors was 29.2 percent, its lowest level since 2001; the median debt-to-income ratio for debtors was 95.1 percent, holding relatively steady since 2016 but well below its 2004–13 levels; and the median payment-to-income ratio for debtors was 13.4 percent, its lowest level ever recorded in the SCF.
That’s the median family—so at least 50% of families—are better or about the same regarding their debt burdens. Some of these are records, so the good news almost certainly extends to some below-median households. The comparison from 2019 to 2022 here spans the worst recession since the Great Depression, higher interest rates, and elevated inflation.
In closing.
Some gloom is understandable today; we lived through the unimaginable with the pandemic. We must also live in the real world, where most Americans are financially better off regarding their jobs, wages, spending, wealth, and debt. And all of that after we account for inflation. We are in a better place.
It’s a huge accomplishment—we should celebrate and build on it.
Market Update
Investors paused the month’s rally Monday in a light post-holiday session. Still, the pause was only a -0.2% dip. A similar flat day Tuesday on little news other than one Fed Governor issuing a softer stance on future interest rates, which confirms the market’s November bullishness. A third straight flat session Wednesday as investors seemed content to just hold the market’s strong November showing. General Motors shares surged when the company announced a huge stock buyback plan, a welcome boon for a stock that has made no gains in four years. The final day of the month saw a +1.5% leap in the Dow Industrial Average driven by big jumps in shares of a couple of the index’s largest components, Salesforce.com and United Healthcare. The other market indexes offered much smaller moves. The final week of November has seen some money largely rotating out of the surging “Magnificent Seven” stocks and into relatively lagging parts of the market. A third Fed Governor confirmed the optimistic tone of his peers in a speech Thursday. A possible tie-up of health insurers Cigna and Humana sent healthcare shares surging, helping the Dow Industrials. Thursday also delivered a very positive earnings report from Salesforce.com to propel the software sector (and Dow Industrials) further upward. Friday brought Fed Chair Powell joining the chorus of Fed members signaling an end to interest rate hikes. The lagging interest rate-sensitive areas of the market took flight. Real estate, finance, and small/mid/micro-caps all blasted upward as money flowed there amid a pause in tech/consumer shares. The Nasdaq added +0.4% while the smallcap Russell 2000 index gained almost +3%, a clear sign of the market’s increasing comfort with risk.
The S&P 500 gained +0.83% for a fifth straight weekly advance. The index sits right at its July highs. The Nasdaq 100 (QQQ) managed only a +0.11% lift as money left the high-flying tech sector this week to buy lagging market areas. Such as the smallcaps, which zipped +3.11% higher yet still remain within a trading channel lasting 18 months.
Warm wishes and until next week.