Opinion: Why are Americans so grumpy about the economy? They’ve never lost so much purchasing power in a year as the stimulus dries up and inflation boils over

If you want to know why Americans are so grumpy about the economy, let’s start with the fact that despite strong job growth and huge wage increases, their incomes just aren’t keeping up with inflation.

Americans just don’t feel poorer – they are poorer. In fact, they have never lost so much buying power in a year.

And if you think our inflation crisis stems from “too much money for too few goods,” you should breathe easy now that American families are no longer getting all that money from Uncle Sam and Uncle Joe. Inflation will surely subside now, right?

Probably not. My view is that inflation has more to do with supply problems than excess demand. I think inflation will stay high until supply constraints are resolved or the economy collapses.

The purchasing power of household income fell by 12% from March 2021 to March 2022.

MarketWatch

Here is the data:

Real disposable income (how much is left after taxes and inflation) fell at an annual rate of 7.8% in the first quarter of the year, the Bureau of Economic Analysis estimated Wednesday. A decline of this magnitude is virtually unheard of outside of a recession.

Learn more about the GDP report: US GDP in the first quarter fell 1.6%. The second quarter does not look much better for the economy

It’s getting worse. Real disposable incomes have fallen in each of the past four quarters and were down 12% from a year earlier at the end of March, a decline that shattered the pre-pandemic record of -2.6% established in 1974.

Income after tax and inflation fell 0.1% in May and was below the first quarter average, the BEA said on Thursday.

Revenues have fallen by $2.5 trillion since March 2021. The extraordinary fall in real incomes is mainly due to high inflation and revenue lost from the expiration of several federal tax and spending programs designed to relieve struggling households and businesses during the pandemic.

Fed Chairman Jerome Powell says the economy is doing well and can handle higher interest rates because households are in good financial shape with plenty of money saved.

Now a lot of people think that this drop in income is a good thing, because they think our current inflation problems were caused by the government giving people too much money in the form of checks higher unemployment, widespread stimulus checks, expanded Medicaid, the Monthly Child Tax Credit, and various other tax and spending programs.

The stimulus worked, but did it work too well?

This relief has been credited with keeping millions out of poverty as the economy shut down and slowly reopened during the COVID pandemic in 2020 and 2021. The payments enabled families to feed themselves, s shelter and dress. But many critics say the extra money has fueled inflationary pressures that have driven consumer prices up 6.3% over the past year (measured by the same price index the BEA uses to calculate real disposable income).

Our inflation is simply a matter of too many dollars chasing too few goods and services, they say.

Most of these government programs have now been dropped or reduced. Government transfer payments have fallen $2.5 trillion since peaking in March 2021, with nearly all of that loss hitting poor and middle-class families.

Meanwhile, taxes paid rose $500 billion, fueled by capital gains booked after another year of double-digit gains for the S&P 500 SPX,
-1.27%,
bracket drift and the expiration of the Child Tax Credit and other temporary tax provisions. Taxes rose to 14.4% of personal income in the first quarter, just a tick from the record 14.5% recorded in 2001.

But while the government has stopped giving “too many dollars” to American families, that doesn’t necessarily mean our inflation problem is over, say the Fed and others. Because American families have saved a lot of money (between $2 trillion and $4 trillion) during the pandemic, they have plenty of money to spend, even if their incomes have plummeted.

The final word from the Fed: Powell says there is no guarantee of a soft landing for the US economy

Fed Chairman Jerome Powell agrees, saying the economy is in good shape and can handle the higher interest rates expected FF00,
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because the households are in good financial health with a lot of money saved.

Rex nut: Why Interest Rates Aren’t Really the Right Tool for Controlling Inflation

The real value of household checking accounts, savings accounts and money market funds has increased by about $4 trillion since the start of the pandemic.

MarketWatch

Theories fill the void left by facts

This is where the trail of facts I’ve been following fades: all the numbers I’ve talked about so far are aggregated data. The government is adding up the savings of everyone from Elon Musk to the SDF under the rails and everyone in between. What we don’t know is how these $2 trillion or $4 trillion of “surplus” savings are distributed among the 333 million people living in this country.

If the treasury is held primarily by middle-class families who have saved their stimulus checks and child tax credits, then they could spend those savings for months or even years as they try to maintain a lifestyle that their monthly income can no longer support. . This would keep inflation simmering, as consumer demand would continue to outstrip the supply of goods and services.

Recession risks are rising, but the U.S. economy is not set for a slowdown

But if the excess savings are mostly held by the ultra-rich who pocketed some of their paper wealth during the big bull market of 2020 and 2021, then inflationary pressures going forward would be weaker, because far fewer this cash hoard would be spent and there would be less excess demand to push prices higher.

The Fed tries to estimate the allocation of different asset classes each quarter in its cash flow reportbut the Fed admits that his model is not up to the task of accurately assessing what type of families are saving – rich or poor, young or old, black or white. The Fed is currently conducting the 2022 consumer finance survey that will determine cash allocation, but that data won’t be released for years.

The smell test

Fed economists strongly suspect that ordinary families have dramatically increased their savings during the pandemic. Researchers examining anonymized bank account data from JP Morgan Chase and Bank of America arrive at the same observation.

But it doesn’t pass the smell test for me. If most families have tens of thousands of dollars in the bank or in a money market fund, why are they so anxious about inflation? Why are they so grumpy? They saved up for a rainy day, and it’s raining.

My hunch is that many, if not most, families are struggling to pay the bills, and they’re starting to cut back on discretionary spending as the cost of buying basic necessities skyrockets. If I’m right, consumer spending will slow faster than economists and the Fed expect.

Indeed, consumer spending fell by 0.4% in real terms (corrected for inflation) in May, the government announced on Thursday. That prompted many economists to cut their estimates for economic growth this quarter and this year. Which means the Fed could have the recession it hopes to avoid.

The key to growth this year may hinge on answering one of the biggest unanswered questions: how much do typical families have in the bank? We need answers to this question now, not two years from now.

More essential reading on inflation:

The Federal Reserve can’t even get the economy in the right direction

Inflation is now rooted in the necessities of life. Which means the Fed has little hope of reducing the cost of living without putting millions of people out of work.

Inflation inequality hits the working class harder than at any time on record

About William Rowan

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