Written by Jamie McGeever
ORLANDO, Fla. (Reuters) – The U.S. Federal Reserve will resist cutting interest rates at all this year, as previous hikes appear to have had only a modest impact on corporate and household balance sheets. There are growing whispers that this may be the case.
Nominal debt levels are high, and a cumulative 500 basis point hike could still open a hole of distress, but businesses and households generally appear to be making good debt payments, income streams are holding up, and cash The mountain of is earned.
This means that the most aggressive rate hike cycle in 40 years is not causing the stress that many feared, and that economic expansion and disinflation are creating strong tailwinds.
As a result, expectations for a rate cut this year are rapidly shrinking, with analysts at private equity giant Apollo Global Management even predicting no rate cut at all.
If consumers and businesses remain as resilient as they have been recently, they will not be alone.
Rising real wages have kept inflation-adjusted median household income on a solid recovery path since June last year, according to research by Matthias Scaglione and Romina Soria of consulting firm Motio Research.
Excluding patchy survey data from March to October 2020, real median household income has returned to pre-pandemic levels. The “glass half-empty'' interpretation implies four years of stagnation, while the “glass half-full'' view suggests that sustainable expansion is sufficiently facilitated.
“The real median household income is finally catching up with the economy,” Scaglione said.
If the current trajectory is maintained, it will help revitalize the economy.
$3.7 trillion in excess cash
A household's economic weight is not determined solely by income, although it is important in its own way. Overall wealth includes the value of assets such as stocks, bonds, and real estate, and by this measure, household budgets also appear to be fairly healthy.
San Francisco Fed researchers found that although $13 trillion in real “excess” wealth compared to pre-pandemic trends was wiped out thanks to stock holdings and savings withdrawals, real household wealth is now lower than it was in February 2020. found that it is still high.
Coupled with Wall Street's recent rally, “this could indicate that spending from assets remains strong going forward,” although more liquid assets such as savings are likely to remain “lower than their pre-pandemic path.” It warned that it was approaching “substantially” lower levels and could curb spending. .
If a decline in savings suggests a depletion of households' cash buffers, an increase in current account balances tells the opposite story.
Economists at Barclays estimate that households are sitting on about $2.6 trillion in “excess” cash, based on averages over the past 30 years.
Add in the estimated $1.1 trillion in excess cash held by non-financial companies, and they estimate that there is about $3.7 trillion in readily available cash on the combined balance sheets of U.S. businesses and consumers.
In a “no landing” environment, money is more likely to be spent or invested. “Households and non-financial businesses may begin to reallocate precautionary (deposit) buffers as they become less concerned about recession risks,” Barclays economists said last month.
just beautiful
But what about the liability side of these balance sheets?
Nominal debt is rising, reaching record levels by some measures such as credit card balances. This has not escaped the attention of policymakers, who are increasingly warning of potential financial and economic risks.
According to the New York Fed, 3.1% of household debt was in some form of delinquency at the end of last year. However, this is still 1.6 percentage points lower than in the fourth quarter of 2019, just before the pandemic.
Household debt as a percentage of gross domestic product (GDP) was 73.3% at the end of September, the lowest level since 2001, when the dot-com bubble burst and the recession began, according to Federal Reserve data.
Russell Price, chief economist at Ameriprise Financial, also noted that credit card debt as a percentage of disposable income (at a historically low 6.5%) remains below 2019 levels.
Surprisingly strong U.S. nominal GDP growth, corporate earnings, and stock market performance over the past year also helped reduce the relative debt burdens of companies.
The ratio of non-financial companies' debt to market capitalization was approximately 24% as of the end of September. Although this is a slight increase from a few years ago, it is still one of the lowest on record.
This may have been colored by rising stock prices, with the S&P 500 and Nasdaq subsequently hitting new highs. However, regardless of how the equation is calculated, this is further evidence of the cash buffer held by the company.
On a broader level, US debt for non-financial businesses as a share of GDP fell below 50% last September for the first time since the end of 2019, according to Fed data.
“'Beautiful' revenue-led deleveraging,” Bob Elliott, CEO of Unlimited Funds and a former Bridgewater executive, recently tweeted.
(The opinions expressed here are those of the author, a Reuters columnist.)
(Written by Jamie McGeever; Edited by Margherita Choi)
