by Zain Jaffer
One of the economic metrics that I personally keep track of from the US Federal Reserve Database (FRED) are the various loan delinquency charts [https://fred.stlouisfed.org/categories/32440]. In the real estate business, most big projects are heavily financed by debt. We are affected by interest rate hikes, and just to stay afloat, we need to ensure that renters or buyers have enough money to pay their rent or home payment.
Although not all charts as of May 2024 reflected a major change, take a look at the chart for bank consumer loans [https://fred.stlouisfed.org/series/DRCLACBS]. Granted there may be a lot of factors responsible for this rise in consumer loan delinquencies, it is still part of the perception that people have about the economy.
Then there are also the delinquencies on credit card loans [https://fred.stlouisfed.org/series/DRCCLACBS]. Probably people letting go of expenditures they can no longer afford.
The way we all normally spend our money is also to some extent the way that businesses and companies spend money. We all have a finite limited income. Sometimes we earn more, sometimes we earn less.
All of us divide our expenses into line items we must pay at all costs and discretionary line items we only spend on when we have enough money. Often when we are able to buy or spend on even the discretionary items like iPhones, gym memberships, vacations abroad, company outings, we to some extent say that the economy is doing well. That is because we project our own situation to the macro picture.
That’s not how economists, politicians, news media, and others in places like Washington, DC and New York put it. The economy is doing well because the macroeconomic figures are doing great, joblessness is low, the stock market is flying high, and so forth. They project the macro picture and tell you the economy is great.
What they do not tell you is that while the tech giants making record gains because of Artificial Intelligence (AI) and other factors, many in the S&P 500 companies who make ordinary products and services are not doing so well. It is just that the Magnificent Seven stocks [https://edition.cnn.com/cnn-underscored/money/magnificent-7-stocks] are pulling the S&P 500 average up [https://markets.businessinsider.com/news/stocks/stock-market-outlook-magnificent-7-tech-stocks-outperform-sp-493-2023-11].
Therein lies the disconnect. While you are making sense of your own situation, of whether you can afford extras or not, they (our thought leaders) are making judgements based on average figures.
In reality average figures try to represent a distribution that could have a wide spread. On the upper part of that distribution you might have tech savvy bros who are making a killing on tech stocks like Nvidia, Alphabet, Microsoft, and others.
On the lower part of that distribution is a single mom saddled with a student loan, just barely paying for gas, groceries, energy, and trying to figure out how to complete the payment for the month’s rent. She might be over extended on her credit card, and has totally abandoned the idea of saving for a new car or a mortgage downpayment.
Maybe on a 3.5% interest mortgage a single mother could have considered buying a starter house. But since the rates doubled to 7%, that effectively means she would need to have double the monthly payments she would have had to make on that old rate. So no dice because she is not making enough.
If your monthly income is barely enough to cope with basic must pay bills and not enough for discretionary spending, that is worrisome. Money spent on discretionary items also means that the companies that make those items will make profit, and have money to pay their employees. The employees of those discretionary item companies also need to eat, buy clothing and gas, and have a roof on their head. Maybe they are part of the renters (or home buyers) who might be in danger of defaulting. Who knows?
That is how our economy works. Aside from the intended consequence that politicians want to achieve when they introduce measures that impact the economy, there are also unintended consequences.
When watching the news one might be led to believe that the economy is doing great, all you need to do is buy tech stocks and crypto (as if you had the money for that), and the only issues that will matter are the social issues of the day and where the parties stand.
From where I stand, affordability is the number one issue on many people’s minds right now. People are fed up with living in a different world as compared to what politicians in Washington, DC and the news media are saying.
The Bill Clinton campaign strategist James Carville said it right, and it still applies today. “It’s the Economy, stupid.”
The economy is what matters to a lot of people. Their ability to have a better economic life and not just work to pay the bills. Everything else is just a discretionary line item.
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