By Jamie McGeever
ORLANDO, Florida (Reuters) – Murmurs are growing that the Federal Reserve might resist cutting interest rates at all this year as corporate and household balance sheets look to have taken only a glancing hit from rate hikes to date.
While nominal debt levels are high and 500 basis points of cumulative hikes may yet open pockets of distress, companies and households appear to be servicing debts comfortably overall – income streams are holding up and cash piles are earning.
In short, the most aggressive rate-hiking cycle in 40 years has not created the stress many feared, and the economy’s expansion and disinflation have created a powerful tailwind.
So much so, rate cut expectations for this year are being scaled back rapidly and analysts at private equity giant Apollo Global Management are even predicting no cuts at all.
They won’t be alone if consumers and businesses stay as resilient as they have been lately.
Research by Matias Scaglione and Romina Soria at consulting firm Motio Research shows that inflation-adjusted median household income has been on a solid recovery path since June last year thanks to rising real wages.
Excluding patchy survey data from March-October 2020, real median household income is back at pre-pandemic levels. The “glass half empty” interpretation is four years of stagnation, but the “glass half full” view is a sustainable expansion is well fueled.
“Real median household income is catching up with the economy, finally,” Scaglione said.
If the current path is maintained, it will help drive the economy.
$3.7 TLN EXCESS CASH
Households’ economic heft is not determined solely by income, important as it is. Overall wealth includes the value of assets like stocks, bonds and real estate, and by this measure, households also appear to be in reasonably fine fettle.
Researchers at the San Francisco Fed find that although $13 trillion of real “excess” wealth relative to pre-pandemic trends has been run down thanks to equity holding and savings drawdowns, real household wealth is still higher than it was in February 2020.
Coupled with the recent rally on Wall Street, “this could signal continued strength in spending out of wealth going forward,” although they caution that more liquid assets like savings are approaching levels “significantly” lower than the pre-pandemic path and could curtail spending.
If lower savings suggests households are running down their cash buffers, rising checking account balances tell the opposite story.
Using the 30-year average as a benchmark, economists at Barclays estimate that households are sitting on around $2.6 trillion of “excess” cash.
Add in an estimated $1.1 trillion of excess cash held by non-financial firms, they reckon around $3.7 trillion of ready-to-be-deployed cash is sitting on the combined U.S. corporate and consumer balance sheet.
In a “no landing” environment, it’s money more liable to be spent or invested. “As households and non-financial companies worry less about recession risk, they could start to reallocate their precautionary (deposit) buffers,” Barclays economists wrote last month.
JUST BEAUTIFUL
But what of the debt side of these balance sheets?
Nominal debt is rising and by some measures, such as credit card balances, to record levels. This has not escaped the attention of policymakers, who are increasingly warning of the potential financial and economic risks.
At the end of last year, 3.1% of outstanding household debt was in some type of delinquency, according to the New York Fed. But that is still 1.6 percentage points lower than the last quarter of 2019, just before the pandemic.
Fed figures show that household debt as a percentage of gross domestic product at the end of September was 73.3% – the lowest since 2001, when the dotcom bubble was bursting and recession was kicking in.
And Ameriprise Financial chief economist Russell Price points out that credit card debt as share of disposable income – at an historically low 6.5% – is also still below 2019 levels.
The surprising strength of nominal U.S. GDP growth, corporate earnings and equity market performance over the past year has helped ease companies’ relative debt burden too.
Non-financial companies’ debt as a share of their market cap is around 24% at the end of September. That’s up a little from a couple of years earlier, but is still one of the lowest on record.
This may have been embellished by the rise in share prices, which has lifted the S&P 500 and Nasdaq even further since then to new highs. But regardless of how the equation is calculated, it is further evidence of the cash buffer companies have.
On a broader level, Fed data shows that non-financial corporate America’s debt as a share of GDP in September last year fell below 50% for the first time since the end of 2019.
“An income-driven ‘beautiful’ deleveraging,” tweeted Bob Elliott, CEO at Unlimited Funds and former executive at Bridgewater recently.
(The opinions expressed here are those of the author, a columnist for Reuters.)
(By Jamie McGeever; Editing by Marguerita Choy)
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