Upper Earners Hold Most Savings On Hand

Consumers are now saving less than before the pandemic, as stimulus assistance funds and generous unemployment benefits have gradually evaporated, encouraging consumers to tap their savings at an accelerating pace. The drop in savings has been especially prolific for those nearing retirement. As markets have pulled back, so have retirement fund values, elongating the retirement threshold for many.

Savings rates rose dramatically in 2020 as billions of dollars in stimulus relief payments made their way into consumer accounts. Federal Reserve data found that households spent only 40 percent of their payments, used 30 percent to pay down debt, and saved about 30 percent on the initial round of stimulus payments. The spectacular rise in the savings rate to nearly 34 percent in April 2020 was a validation of how much of the payments went towards savings.

As additional relief programs along with generous unemployment benefits became effective, the savings rate remained elevated through the end of 2021. The most recent data show that the savings rate dropped to 5.4 percent in May 2022, lower than where it stood at roughly 7.5 percent before the pandemic began.

A Fed analysis found that lower-income households tend to spend most if not all of their income and end up having very little disposable income at the end of each month. Most lower-income households have already depleted their pandemic surplus funds in savings and are also being squeezed by inflation as food and energy prices continue to escalate. This has led to upper-income earners holding the most savings on hand, while lower-income savings begin to dwindle. (Source: U.S. Bureau of Economic Analysis, St. Louis Federal Reserve Bank, Marginal Propensity to Consume Working Paper; Federal Reserve Bank of Boston)

Strengthening U.S. Dollar May Help Curtail Inflation

The U.S. dollar has risen over 12.73% since the beginning of the year, driven by increasing interest rates and a flight to safety for international investors.

A stronger dollar can also hinder certain U.S. companies with a large portion of their sales overseas. Should the dollar continue on its rising trend, economists and analysts believe that the run-up in the dollar will translate into lower earnings for several U.S. companies. Foreign investors tend to flock to the U.S. dollar as rates increase, seeking higher returns on idle cash and during periods of geopolitical turmoil.

A challenge that emerges for U.S. multinationals when the dollar rises is that the price of U.S. exports becomes more expensive worldwide. As the dollar increases in value versus other currencies, U.S. exported goods become less affordable in the international markets. Conversely, the strengthening dollar has also made imported goods into the United States more affordable, which become less expensive for American consumers as the dollar rises.

Sources: https://fred.stlouisfed.org/, Bloomberg, Commerce Department

What Falling Labor Productivity Means

The most recent data released by the Labor Department revealed the largest quarterly drop in productivity since 1947, decreasing at an annualized rate of 7.5%. The drop in productivity was concurrent with the largest rise in labor costs since 1982. Both of these measures are also indicators of inflationary pressures for both companies and consumers. Many companies have been passing along higher costs to consumers but can only do so for so long until competition forces companies to hold prices steady and absorb higher costs. This can also lead to decreased levels of hiring, and lower wages as companies struggle to maintain profitability levels.

Data surrounding labor during the pandemic has been considered unreliable and inconsistent by many economists, meaning that the true effects of the COVID-19 pandemic and worker retention are still not certain. An essential data set is labor productivity, which is a measure of how efficiently companies are utilizing workers to produce products and services. This past month, the largest fourth-quarter drop in labor productivity since 1993 was observed, according to the Bureau of Labor Statistics, marking a historic decline in productivity.

Federal Reserve survey results, reported in the Fed’s Beige Book, have identified that a growing number of manufacturers and industrial companies are increasingly moving towards automation, replacing previously desired workers with robotic gear. Rising wages and a dwindling labor pool have forced some companies to resort to machines instead of hiring workers. (Sources: Labor Department, Federal Reserve Beige Book; https://www.federalreserve.gov/monetarypolicy/files/BeigeBook_20220601)

Notable Supreme Court Ruling Impacting the Economy:

The United States Supreme Court recently ruled in West Virginia v. Environmental Protection Agency (EPA) ruled the agency overstepped its statutory authority in regulating emissions of carbon dioxide (CO2) from power plants. Chief Justice John Roberts, for the 6-3 majority decision, stated that “Capping carbon dioxide emissions at a level that will force a nationwide transition away from the use of coal to generate electricity may be a sensible ‘solution to the crisis of the day…but it is not plausible that Congress gave EPA the authority to adopt on its own such a regulatory scheme. A decision of such magnitude and consequence rests with Congress itself, or an agency acting pursuant to a clear delegation from that representative body.”

This ruling could very well impact the SEC’s attempt to regulate through its proposed ESG (environment, social, governance) rules and requirements. In fact, many are not happy about such upcoming requirements. Elon Musk stated that “Exxon is rated top ten best in [the] world for environment, social & governance (ESG) by S&P 500, while Tesla didn’t make the list! ESG is a scam. It has been weaponized by phony social justice warriors.” In any event, “Republican state officials, emboldened by [the] recent Supreme Court ruling, are already threatening to sue, claiming regulators don’t have the authority.” (Source: The Conversation, Heartland Institute)