Sep 22, 2022

Savings Eroded by Inflation

Total US Personal Savings back below 2015-2020 average all while being eroded by 8% inflation.

If you posted this chart of the ramp in US consumer credit usage just a few months back you would have received a barrage of responses with people saying the US consumer has never been in a stronger state.

It was true at the time. In 2021 the US consumer had a thick financial cushion...

Then at the start of 2022 it ticks down violently. That alone would have been worth noting but it's not really until you realize that this chart doesn't reflect purchasing power of that savings. Basic math tells us that recent inflation has decreased that total amount by at least another 8%.

As savings gets eaten and inflation continues on, particularly in core areas like rent, US consumers are clearly turning to credit...

In my opinion, it's not the total amount that's problematic--we're basically back to pre-pandemic trend–it's the velocity with which the total is increasing. If that doesn't abate* and inflation doesn't roll over, the area of the market that looks most vulnerable (farthest to fall) is the housing market.

With falling personal savings, increased debt loads, and negative real income growth, how exactly are home buyers going to afford 6%+ mortgages on a median house price of almost $400,000? The median house price alone is up 7.7% year-over year from the latest September 2022 reading.

Consumer discretionary and other "nice-to-haves" will of course get hit. But the price of a house is too high to remain stable. Here's the ramp in price with 30-year mortgage rates hitting 6% in Washington DC/Alexandria via Bloomberg...

Overview: The United States Economy

*I don't think it will. People get used to living a certain lifestyle and find it hard to pull back unless they're forced to. It's just human nature.

Don't let the economy surprise you.

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