It’s (still) a Party in the USA

Key takeaways

• Pent-up savings supported a strong consumer in 2023. This tailwind hasn’t wound down yet, showing positive signs for early 2024
• Americans generally aren’t feeling the pinch from the Federal Reserve after locking in fixed rates. This makes record levels of debt relatively manageable.
• Inflation has been on a downward trajectory, and we see signs that it will continue to fall.

Something that my team has been discussing is the macro position going into 2024. After a blockbuster year for stocks in 2023, the first trading days have been shaky. As we zoom out and look at the whole outlook, however, it’s a still party in the USA…

Some investors are getting thrown off amidst a stream of seemingly gloomy headlines. It’s easy to hear things about low consumer sentiment or “record debt” and ring the alarm bells. As we take a closer look at the data though, we’ve noticed that a lot of these concerns start to dissipate.

A big headline has been that household debt hit a record 17.3 trillion dollars in Q3, a figure from the New York Fed. Frankly, that number by itself is staggering. If we take a look at debt payments relative to income, however, things get much better. Household debt servicing is only 9.78% of disposable income. That’s slightly less burdensome than the 9.97% from before the pandemic.

Debt payments are still below pre-pandemic levels

Outstanding credit isn’t notably costly, even at record amounts, because a substantial amount of it was issued at inexpensive rates.

Americans rushed to refinance during the pandemic’s low-rate environment. The US effective rate of interest on mortgage debt outstanding, per the Bureau of Economic Analysis stands at 3.74% - below pandemic levels!

Americans generally aren’t feeling the pinch from the Federal Reserve after locking in fixed rates. This makes record levels of debt relatively manageable. Freed income that’s not dedicated to interest payments has served as a boon for spending and helped to lift stocks in 2023.

Data from the St. Louis Fed also shows that the personal savings rate is down to 4.1% from a recent peak of 32% during the pandemic. This under-saving has provided a tailwind to personal consumption. By the time this cumulative under-savings equates to the total amount of pent-up over-savings from the pandemic (essentially returning savings to their long-run trend level) we may be well into late 2024.

A potential economic headwind was the reinstatement of student loan payments last October.

For a variety of reasons – excess savings, aggressive hiring, and loans being held by higher income households – repayment has not had a large dampening effect on demand.

We continue to keep an eye on the labor market. Unemployment below 4% and 8.8 million job openings in the BLS’s JOLTS report are both promising figures. This is especially the case after a rate hike cycle. We’re currently watching more granular metrics, such as added payrolls, to catch it early if data starts to soften.

Last year’s successes seem to be teeing up 2024. Inflation has been on a downward trajectory, and we see signs that it will continue to fall. The Fed’s signal that they’re considering rate cuts indicates that there will be further support for the economy as tightening winds down. Happy New Year and enjoy the party in the USA!

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