What’s going on here?
Middle- and low-income US families are feeling the pinch, with diminishing liquid assets and growing credit card delinquencies, according to the Federal Reserve Bank of San Francisco.
What does this mean?
Research from the SF Fed reveals a troubling trend: liquid assets for middle- and low-income families are down about 13% from pre-pandemic projections, while the wealthiest 20% saw a smaller dip of just 2%. Moreover, credit card delinquencies among these households have surged higher and faster compared to their high-income counterparts, indicating rising financial stress. This strain threatens the future of consumer spending growth, a key driver of US economic output, which makes up around two-thirds of it. The Fed’s attempt to land the economy softly by maintaining the policy rate at 5.25%-5.50% is becoming increasingly tough as the unemployment rate hits 4.3% and monthly consumer spending growth slows to 0.3%.
Why should I care?
For markets: Spending slowdown ahead.
US consumer spending is a significant chunk of the economic output, and with shrinking liquid assets and higher delinquencies among middle- and low-income families, market growth could face headwinds. Investors should tread carefully as these trends could negatively impact sectors dependent on consumer spending.
The bigger picture: Policy pitfalls.
Chicago Fed President Austan Goolsbee’s observation of rising credit card delinquencies highlights the possible risks of overly tight monetary policy. As the Federal Reserve balances between controlling inflation and avoiding a recession, these household economic pressures might complicate policy decisions and their effectiveness.