March 2nd, 2023
Given my optimism in last month’s update, I felt it only necessary to play the contrarian this month and discuss a hard truth we’re confronting this year.
The forgotten stimulus: Student loan relief.
The US economy has been surprisingly resilient. This can be attributed to strong consumer spending which has driven economic growth despite persistent price increases for both goods and services.
Rabid consumer demand has thus far kept US economic growth positive, and it appears we may avoid negative GDP growth in the first quarter of 2023 – an impossibility if you’ve been listening to the evening news, and contrary to the projections of most major Wall Street banks.
The US consumer’s willingness to absorb price increases passed on by corporations has also kept corporate earnings from cratering as initially feared, with Q4 earnings roughly in line with Q3 for 2022. Economists initially attributed the uptick in consumer spending on pandemic stimulus measures. But is that still the case? At what point does the well run dry?
During the pandemic, many US taxpayers were eligible for direct Economic Impact Payments of $1,200 for individuals and $2,400 for married couples, plus $500 per dependent. More than 160 million such payments were made, totaling $269 billion. Expanded unemployment payments were also made, totaling around $260 billion. Other programs, such as moratoriums on foreclosures and evictions and the Paycheck Protection Program (PPP), provided lifelines to renters, homeowners, and small business owners during the depths of the pandemic. PPP payments totaled an additional $800 billion. Those stimulus programs have since ceased, and the monetary payments have likely worked their way through the economy. Consumers who cut back spending during the pandemic made up for lost time with a demand surge for goods, dining experiences and vacations. This rapid uptick in spending triggered a large chunk of the inflationary pressure the Fed is now battling. Though, as I’ve mentioned in previous posts, ‘all’ of our inflationary woes cannot be simply attributed to government handouts. Regardless, let’s continue…
If the fate of the US economy rests in the hands of the American consumer, there could be troublesome waters on the horizon. The well my, in fact, be running dry. American’s savings accumulated during 2020-2021 have since evaporated, pushing the personal savings rate down below pre-pandemic levels (Exhibit 1).
Meanwhile, American credit card debt has reached an all-time high of $986 billion – up 15% in the past year. Credit card debt now exceeds personal savings for more than a third of Americans. Furthermore, the cost of carrying debt has risen along with interest rates hikes – the average credit card rate for Q3 of 2022 was 21.6%. Despite this apparent financial strain, personal interest payments remain significantly below pre-pandemic trends (Exhibit 2).
How is this possible? The forgotten, and last remaining, COVID-19 stimulus: the student loan repayment moratorium.
During the pandemic, the US government implemented a pause on student loan principal and interest payments for most federal student loan borrowers, which was originally set to expire on September 30, 2021 but has been extended multiple times. Meanwhile, President Biden pushed a separate measure to forgive up to $20,000 for qualifying borrowers. That forgiveness program was challenged in the courts and is currently under review. Regardless of the outcome, student loan payments and interest accruals will resume within 60 days of the resolution of the litigation. If the litigation is not resolved by June 30th, payments will resume 60 days after, on August 29, 2023.
The paused student loan payments have been an ongoing stimulus measure for the 43.5 million borrowers with federal student loans. After roughly 3-years of forbearance, many of these borrowers have likely grown accustomed to the extra money in their budgets and will need to cut back from either discretionary spending or reduce their personal savings when payments resume. The average federal student loan payment is $267 for a bachelor’s degree and $567 for a master’s degree, at an average interest rate of 5.8%. With approximately $1.7 trillion in outstanding student loans, the paused student loan interest amounts to nearly $100 billion in additional spending and/or savings annually.
While the $20,000 loan forgiveness would help reduce the student loan tsunami – the average federal student loan balance is $37,574 – the plan does nothing to help borrowers currently accumulating debt or resolve the larger issue of college tuition costs outpacing inflation by about 5x since 1970.
We’ll see how this scenario plays out in the coming months. The politicization of the student loan tsunami is irrelevant – this is a serious discussion that will need to be addressed no matter your political leaning. The harsh reality is that millions of Americans have benefited from the last remaining stimulus measure that is about to end. Many young borrowers likely have not adequately budgeted for the resumption of student loans after the lengthy three-year moratorium. Many of these borrowers also have likely taken on additional debt for vehicles or homes during this period and will face difficult decisions as they account for a new, significant monthly expense.
And finally, has the Fed accounted for this in its interest rate and inflation reduction conquest? More on that in my next post…
And now, your Monthly Market & Economic Update by the numbers.
Interested in learning more? Schedule a call with me HERE.
Warmly,
Mark S Sauer
Market Update
Global Equities: For the most part, equity markets were down for the month of February as further evidence of persistent inflation cast doubts on the Federal Reserve’s ability to achieve its 2% inflation target. The S&P 500 fell -2.83% during the month and the Dow Jones Industrial Average was down -4.19%. Meanwhile, the Nasdaq took a wild ride throughout the month – up nearly 8% in early February while finishing the month with a sharp decline and ending the month up 0.74%. Developed International Markets were also lower, falling -3.47% and Emerging Markets lost -6.65%.
Economic Update
Inflation Data: Both Consumer (CPI) and Producer (PPI) Price Index data, released mid-month suggested that inflation would take a respite from recent softening. The Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) Index, confirmed that narrative with an uptick in both durable and nondurable goods as well as energy prices. Services inflation was steady at 0.6% month-over-month. Overall, headline PCE was up 5.4% year-over-year and Core PCE (ex-food and energy) was up 4.7%. Both readings were worse than anticipated and cast doubts on the ability of the Fed to get a handle on inflation without crashing the economy.
Charts of the Month
PCE
Our first Chart of the Month is the Personal Consumption Expenditure Index (PCE) data for Goods (blue line) and Services (orange line), monthly rate of change. While Services inflation has been “sticky” and persistently positive, Goods inflation was showing signs of progress and contracting for 5 out of the last 6 months, prior to this week’s +0.6% increase. This may be a temporary blip due to increased automobile sales, but it highlights the uncertainty in the Fed’s continuing fight against inflation, which Chairman Powell has cautioned will be “bumpy” along the way to the 2% target rate.
S&P 500
Our second chart is the daily view of the S&P 500. The S&P is fighting with its consolidation range (purple rectangle). However, it’s finding much needed support above the 200-day moving average (red line). This 9-month consolidation range will prove to be the sticking point for the S&P. Inflation, GDP, and other economic indicators will drive its next move – until then, we should expect the S&P to bounce around with in this range like a ping pong ball.
