Although Wall Street and the real economy (‘Main Street’) make lives more separate than what is often wanted to be seen, the ‘bleeding’ of this 2022 in the stock markets has been noticeable in families. US household wealth fell by the biggest drop on record in the second quarter as the Federal Reserve moved aggressively to rein in rapid inflation, sending stocks tumbling. It is the first edge of Fed Chairman Jerome Powell’s sharp speech in .
The net worth of US households fell by 6.1 trillion dollars in the period between April and June, that is, 4.1%, after having fallen about 147,000 million dollars in the first quarter of the year, according to a Fed report showed on Friday. These consecutive quarterly declines have brought total net worth to $143.8 trillion, the lowest in a year. The biggest ‘hole’ is detected in the value of the shares, which fell by 7.7 trillion dollars in the period. Meanwhile, the value of real estate held by households increased by $1.4 trillion.
Rates multiplied in the second quarter of the year, as inflation worsened, gasoline prices soared to record highs and the Fed unleashed back-to-back rate hikes of record magnitude. This caused the S&P 500 index to plunge more than 16% between April and June.
On the real estate side, while home values are still rising, the housing market – a key source of wealth for Americans – . that is published shows new cracks in the face of the tightening of financing costs with the new direction of the Fed, which stifles demand.
“The economy and have rebounded strongly in the last two years, recovering all production and jobs lost during the pandemic. Asset markets have performed even better. House prices nationwide have risen more than 40% from pre-pandemic levels, while the S&P 500, even after recent declines, is up about 20% from that same point and is up more than 80% from its low. on March 23, 2020. However, and concerns about growth prospects and corporate profits have put share prices under pressure of late.This, coupled with rising mortgage debt, has caused this decline in wealth”, puts James Knightley, an international economist at ING, into the situation.
“Although the Fed doesn’t directly target stock prices, policymakers know that higher rates often hurt stocks and that the loss of wealth on Wall Street is one of the main ways the Fed can affect stocks. to the economy on ‘Main Street’. Consumer spending could be reduced by hundreds of billions of dollars over the next year through this wealth effect”, clarifies the American financial journalist Rex Nutting in his latest opinion column.
Not all negative data in the Fed report. It also shows that household deposits, that is, the money that Americans have in checking, savings and money market accounts, soared to a new record of almost 4.9 billion dollars. Deposits have grown as stimulus checks first from the Trump and later Biden administrations as well as Covid restrictions prompted many Americans to save more. More recently, tight labor markets have also fueled strong wage growth for people across sectors and incomes.
“Massive fiscal and monetary stimulus — $5 billion of direct payments to households through stimulus checks and expanded and increased unemployment benefits, plus another $5 billion of quantitative easing — played a role. made the involuntary savings caused by movement restrictions imposed during the pandemic. The result was that money that would have been spent on goods and services ended up being funneled into financial and non-financial assets,” explains Knightley.
That financial ‘cushion’, although concentrated in the wealthiest households, is likely to help support consumer spending in the coming months. However, it is forcing families to spend more on necessities such as food.
More ‘rich’ than before covid
The ING analyst is reluctant to see it on the pessimistic side. Knightley first underlines that household wealth remains well above pre-pandemic levels. “While this decline in wealth is not exactly good news, it needs to be set against the whopping $27 trillion net gain in household wealth during the pandemic overall. Even after the second-quarter decline, net worth stands at about 144 billion dollars,” he slides.
“With the intensification of the forces of recession, both abroad, due to the European energy crisis and the weakness of Chinese activity, and at home, due to the rise in interest rates, the strength of the dollar and the weakening In the housing market, the consumer will play a huge role in the length and depth of the recession.Fortunately, the job market remains strong, with more than two job openings for every unemployed American, while the wealth figures for today suggest that the household sector is in a fundamentally strong position: cash balances look particularly good,” he adds.
The economist also highlights that, as a proportion of disposable income, household assets are 880%, while liabilities are “only” 102%. “This is a much better position than any previous recessionary environment and means the consumer sector should be better able to withstand intensifying economic headwinds,” he ventures. Consequently, he concludes, “we continue to expect a likely recession in 2023 to be modest and short-lived, assuming a rapid easing of monetary policy by the Fed.”
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