LUTZ BUSINESS INSIGHTS
the current financial health of the american consumer
justin vossen, investment adviser, Principal
PUBLISHED: FEBRUARY 15, 2021
Given the COVID-19 crisis, there has been much concern for people’s physical and mental health. However, financial health has also been impacted in a variety of ways depending on jobs, businesses, and government reaction to the events. Looking at the financial health of the United States, it may be surprising to see where we sit as we enter 2021. Hopefully we are seeing the beginning of the end of the pandemic.
It is true many Americans are currently suffering financially. The restaurant and leisure industry has been decimated, while technology and other sectors have thrived. There is no doubt wealth disparity across sectors and geographies. However, if we measure the American consumer as a whole, it is in a miraculously good position as we enter 2021.
Through the third quarter of 2020, personal income per capita has risen to a record. The surge in personal income per capita was the biggest jump recorded. A combination of stimulus money, increases in unemployment benefits, and the reality that more jobs have been maintained throughout the pandemic than expected have caused the boost in overall income.
A rise in incomes has kept the economy moving forward, but it may have been even better for the consumer’s balance sheet. As you can see in the following graph, while incomes jumped, another curious thing has happened. Debt has fallen as consumers have taken stimulus checks and paid down their revolving credit balances in bank and credit card loans.
That is a 13%+ decline in revolving debt. Sure, credit access arguably tightened, but those were existing balances. The consumer, lacking the ability to do “normal” consumer things in the pandemic, did the responsible thing and paid down some debt. They also did something else: consumers saved double to triple the amount they were saving prior to the pandemic relative to their disposable incomes. The last time this ratio reached 15% was in 1975, and we eclipsed more than 25% in 2020.
Americans saved more money, paid down debt, and judging by the performance of various stocks, they invested some as well. Also, consumer liquidity has increased dramatically as total deposits in cash accounts surged to records. The Fed’s research shows that checking account balances doubled from where they were to end 2019. Savings, debt pay downs, and asset growth have all contributed to taking household net worth to its highest level ever.
On average, American’s are in the best financial positions of their lives coming out of the pandemic. While we know some are suffering, the numbers tell quite a different story for the average consumer. What does this mean for the future? Does this mean inflation could become an issue if everyone gets vaccinated and life returns to “normal”? At this point, we have yet to see prices turn above their long-term averages. In fact, food CPI is trending at historical averages, and headline and core CPI have been well below historical averages even with all of the supply shortages and increased consumer liquidity. Prices are relatively stable.
Credit: JP Morgan Asset Management – U.S. Guide to the Markets® 1Q 2021
While prices are stable now, it is important to note that we have begun to see an uptick in commodities and inputs. Since the beginning of November, the Goldman Sachs Commodities index (a basket of energy, precious metals, industrial metals, agriculture, and livestock) has risen almost 30%, as you see in the next graph. This is not necessarily inflationary at the moment but could sow the seeds of end good price appreciation if those increases are able to be passed along to consumers. This bears watching in the coming months for sure.
Source Google Finance: 1/19/2021
Side note: Many may point to the red-hot housing market as an inflationary factor. While there is no doubt prices of homes are rising, the data shows that this may be a function of a supply squeeze. Active listings in the U.S., as tracked by Realtor.com, are at almost half of what it was last year and almost 60% lower than 2016 when rates were at their prior historic lows. With consumer balance sheets better than ever, home building will potentially need to accelerate to keep pace with demand (this could be inflationary, obviously).
It is clear the various forms of stimulus have aided both in keeping the economy moving and consumers overall financially healthy. The moral ramifications of the new monetary and fiscal policy are for another blog, but one cannot argue they did not more than accomplish the goals of aiding individuals during the pandemic. The results explain some of the runup in the market and the belief that the consumer can satisfy their pent-up demand for all things that were postponed or canceled during the pandemic. Could we be on the crescendo of another roaring 20’s era when the economy at that time recovered from wartime devastation and a flu pandemic that killed 675,000 Americans in 1918 and 1919? Time will tell.
The 1920s did see an economic boom and inflation increased, but it was bookended by the Great Depression that began in 1929. This isn’t a forecast of another Depression. In fact, we’ve been through the biggest GDP decline (32.9%) in one quarter this year than the U.S. has ever seen, and consumers are healthier than they were before it entered that decline. This situation is far different with the health of the consumer balance sheet and easier monetary policy (Although, one cannot argue the fact that speculation has increased).
While we keep our pinstripe suits and flapper dresses in our closets until we get a greater distribution of vaccines, we can be optimistic that things will get better. One thing is certain, when the pandemic appears in the rear-view mirror, American’s will have the ability to spend like never before. The only question is, will they? If they do, what byproducts will occur within the economy? If you have any questions about this article or would like to learn more about our Lutz Financial services, please contact us.
Important Disclosure Information
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz Financial. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Lutz Financial is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the Lutz Financial’s current written disclosure statement discussing our advisory services and fees is available upon request.
ABOUT THE AUTHOR
JUSTIN VOSSEN, CFP®, NAPFA + INVESTMENT ADVISER, PRINCIPAL
Justin Vossen is an Investment Adviser and Principal at Lutz Financial. With 21+ years of relevant experience, he specializes in providing wealth management and financial planning services for high net-worth families, business owners in transition, endowments and foundations. He lives in Omaha, NE, with his wife Nicole, and children Max and Kate.
AREAS OF FOCUS
- Investment Advisory Services
- Comprehensive Financial Planning
- Business Owner Planning & Succession
- High Net Worth Families
AFFILIATIONS AND CREDENTIALS
- CERTIFIED FINANCIAL PLANNER™
- National Association of Personal Financial Advisors, Member
- Financial Planning Association, Member
- BSBA in Economics and Finance, Creighton University, Omaha, NE
- St. Augustine Indian Mission, Board Member
- Nebraska Elementary and Secondary School Finance Authority, Board Member
- St. Patrick's Church, Trustee
- Mount Michael Booster Club Board
- Lutz Gives Back, Committee Chair
- March of Dimes Nebraska, Past Board Member
- The Current Financial Health of the American Consumer
- A 100-Year Bet Gone Bad
- Personal Finances: Focusing on What You Can Control
- Planning for College Pragmatically
- Remaining Calm When Uncertainty Surrounds Us
- Am I Ready to Retire? Finding Your Sweet Spot
- 5 Retirement Strategies for Small Business Owners
- Outsmarting the Ivy League?
- An Investor's Year-End Wrap Up & Tax Prep
- Nobody Knows Anything
- Add "Brexit" to the Long List of Uncertainty
- Financial Planning for College Grads
- Fight or Flight - Lesson Learned
- Social Security: The New Rules
- Putting Volatility in Context
- The Asian and European Fronts
- Bubble Looming or a Bubble Popped
- Re-Emerging Markets?
- A Market Perspective
- Timing is Not Everything
- "Yellen" at the Fed
- Mind What Matters...Focus Efforts On What You Can Control
- What to do With a Financial Windfall
- Love Indexes - Hate the Indexes
- Do I Own a Market?
- A Practical Primer On Volatility
SIGN UP FOR OUR NEWSLETTERS!
We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.