US consumers\u2019 savings buffer is gone. Now what?: McGeever<\/p>\n
(Refiles to correct name in headline. The \u200bopinions expressed here are those of the author, a columnist for Reuters.)<\/p>\n
By Jamie McGeever<\/p>\n
ORLANDO, Florida, June 1 (Reuters) – As corporate America continues \u200bto ride the AI boom, huge swathes of the U.S. population are struggling \u200cto keep up, with savings levels plunging. This widening chasm could have serious political ramifications for President Donald Trump.<\/p>\n
However you describe the inequality issue – K-shaped economy, two-speed economy, haves and have-nots – it is clearly getting more pronounced. Two data points last week put this in stark relief: personal savings and corporate profits.<\/p>\n
The personal savings rate fell \u2060to a four-year \u200blow of 2.6% in April. It has halved in the past year and, excluding the single month of June 2022, is now the lowest since 2008.<\/p>\n
Zoom out further, and one can see just how flimsy U.S. consumers\u2019 savings cushion really is. Aside from 20 months in the 2005-08 period, consumers\u2019 savings rate has never been lower since comparable records began in the 1950s.<\/p>\n
What\u2019s more, inflation – boosted by the ongoing energy price squeeze – is now \u200boutstripping wage growth for the first time in three years. The rapid rate at which Americans \u200care running down savings to maintain spending simply can\u2019t last.<\/p>\n
At the same time, some closely watched measures of consumer confidence have also dropped to the lowest on record. So it\u2019s reasonable to assume that household consumption – the biggest and most important pillar of the economy – could soon come under intense pressure.<\/p>\n
But for now, Wall Street isn\u2019t asking too many questions, with U.S. equities continuing to hit record highs.<\/p>\n
That\u2019s understandable given what\u2019s happening in corporate America. Figures released last week showed that U.S. corporate profits as a share \u200cof output in \u200bthe first quarter rose to 18.4%. That\u2019s the \u200csecond-highest reading since comparable records began in the 1940s. Pre-tax profits as a share of GDP also held steady near a record-high 14%.<\/p>\n
Whichever way you \u200bslice it, corporate profitability has never been higher, even as many Americans are seeing their financial \u2060situations become more precarious.<\/p>\n
\u201cI don\u2019t think that these trends are economically or politically sustainable,\u201d says economist Phil Suttle. \u201cHow they get resolved \u2060is an open issue but, in my view, both profits and consumption have significant forward-looking downside risk.\u201d<\/p>\n
This makes intuitive sense. But the question is, who is doing most of the \u200bspending?<\/p>\n
Moody\u2019s analysts\u2019 estimates that the top income decile accounts for 50% of all consumer spending are disputed, and the more accurate share may be around 35-40%. But that\u2019s still substantial.<\/p>\n
The richest 10% of Americans account for 90% of U.S. equity holdings, with the top 1% representing half of the country\u2019s entire stock market wealth. These asset owners have seen U.S. equities jump 30% in the past 12 months.<\/p>\n
As long as stock prices stay high, the asset-owning rich can likely continue to support aggregate spending and thus keep headline \u2060GDP running near a healthy 2% clip.<\/p>\n
But this masks the mounting strain across the bottom half of the U.S. population, which is being squeezed by inflation, rising borrowing costs and dwindling savings.<\/p>\n
Just look at consumers\u2019 increasing struggle to keep up with debt repayments. As Troy Ludtka at SMBC Nikko Securities Americas notes, auto loan delinquencies of 90 days or more rose to a record-high 5.6% in the first quarter and credit card delinquencies rose to 13.1%, the highest since 2011.<\/p>\n
\u201cThe interesting question is at what point does the lower point of the K break the entire economy? What is the limit to \u2060this inequality?\u201d Ludtka argues.<\/p>\n
The limit may be less an economic issue than a \u200bpolitical one.<\/p>\n
Trump\u2019s approval ratings on the economy have collapsed since he ordered military strikes on Iran three months ago, largely due to rising price pressures. Meanwhile, polls suggest \u2060the Republicans will lose the House of Representatives in the midterm elections, and perhaps the Senate too \u2013 with many voters pointing to \u201ccost of living\u201d as a primary concern.<\/p>\n
These political pressures may grow even if the \u200ceconomy continues to hold up relatively well because of the AI-fueled capex boom in tech and rapid corporate profit growth.<\/p>\n
So the ultimate questions are, how much longer \u200bcan average Americans stay afloat \u2013 and continue spending \u2013 now that their savings buffers are rapidly disappearing? And how much more extreme will U.S. voters allow this \u201cK-shaped\u201d dynamic to become before pushing back with policy demands?<\/p>\n
Trump\u2019s Republican Party may find this out in November.<\/p>\n
(The opinions expressed here are those of the author, a columnist for Reuters)<\/p>\n
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