Consumer Spending Puzzle
I’ve got to be honest. It has been a little bit a head scratcher over the past few years to see inflation drive prices higher, yet consumer spending continuing to stay strong. How has the American consumer kept pace?
For a while, we were told it was the COVID money handed out by the government. Many workers built up savings during 2020 and 2021, and then used it to offset the higher prices in 2022 and 2023. That was certainly part of it.
We also know that wage growth has now surpassed the inflation rate, so rising paychecks have certainly helped.
Surge in Overall Wealth
What about a surge in overall wealth? I read a very interesting article this week, written by David Kelly, who is the chief global strategist at JP Morgan Asset Management.
He opines that the rise in the stock market and in home values has fueled consumer spending.
JP Morgan estimates that the net worth of American households rose by $2.8 trillion in the third quarter to a record $157.2 trillion, or roughly $446,000 per household.Total net worth is up 11% over the past year and 47% over the past 5 years. Consumer prices have increased 23% and income is up 35% over that same time period.
Home Equity Boom
The value of home equity has climbed by 83% over the past five years to $35.1 trillion. Breaking that down, there are 87 million homeowners in the United States, compared to 79 million five years ago. JP Morgan estimates that the average American homeowner has over $400,000 in home equity, compared to $240,000 in 2019.
Impact on Consumer Spending
Kelly theorizes that just the gain in household wealth over the past five years could fund 2.5 years of consumer spending. Of course, as he points out, it’s not all being used for that. But, an increase in home equity can be used for borrowing for more spending, and certainly investors could use their stock gains to raise cash for major purchases.
Retirement Confidence and Financial Planning
The gains in wealth is also helping investors reach their retirement goals. A recent survey from the Employee Retirement Benefit Institute found that just 21% of workers said they were very confident about having enough money in retirement.
That means the increase in household wealth may not have helped many workers feel better about retirement. We believe that feeling confident about retirement is connected to having a written financial plan. And the numbers back that up.
The Schwab Modern Wealth Survey taken this year found that just 36% of Americans have a written financial plan. But, of those who do, 96% say they feel more confident about their retirement.
Conclusion
The increase in household wealth may be clearly helping THE economy, but how is it helping YOUR economy?
The opinions voiced in this video and blog are for general information only and are not intended to provide specific advice or recommendations for any individual.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Independent Advisor Alliance. Independent Advisor Alliance and GenWealth Financial Advisors are separate entities from LPL Financial.
