Podcast Summary
Perception of Inflation Impacting Biden's Economy: People's perception of inflation, beyond just the numbers, can negatively impact their view of Biden's economy, even if wages and prices are roughly equal.
While the economy under President Joe Biden has seen significant growth and job creation, the combination of fiscal stimulus and low interest rates has also led to inflation. Although wages and prices have roughly kept up with each other, people are loss averse, meaning they feel the pain of losing more than the pleasure of gaining. Therefore, even if wages and prices are roughly equal, the perception of inflation leading to a decrease in purchasing power can negatively impact people's perception of Biden's economy. It's essential to consider the psychological impact of economic conditions beyond just the numbers.
Rising costs under Biden's administration strain American families: Gas prices, mortgage rates, and housing costs have increased significantly under Biden, causing financial stress for many Americans, especially for the rent-burdened
The current economic situation under the Biden administration is causing significant financial strain for many Americans. While wages have increased, the cost of living, particularly in areas like gas and housing, has risen at an even faster rate. The volatility and unpredictability of these costs add to the anxiety and instability for individuals and families. For instance, gas prices have more than doubled since Biden's inauguration, making a visible and substantial impact on family budgets. Additionally, mortgage rates have more than doubled, and housing prices have continued to rise, making it difficult for both renters and homebuyers. Despite these challenges not being solely the result of Biden's actions, he is still receiving the blame. The situation is particularly concerning for those who are rent-burdened, as the US National Rent to Income Ratio stands at 30%. Overall, the economic landscape is causing significant financial stress for many Americans, and the situation shows no signs of improving soon.
Challenges on both sides of the balance sheet: Despite a strong employment picture, the housing crisis and disappointing market returns for retirees present challenges for Americans' financial situations.
The current economic climate presents challenges for both the liabilities and assets sides of the average American's balance sheet. On the liabilities side, the housing crisis persists as a long-term issue, with population growth and household formation outpacing housing unit construction. Additionally, retirees have experienced disappointing market returns since Biden's inauguration, with both stocks and bonds underperforming. On the assets side, however, there is good news in the form of a strong employment picture, with consistent payroll gains and a labor market showing no signs of slowing down. Despite these positive employment trends, the overall economic climate may leave many Americans feeling disappointed with their financial situations.
Leverage for Lower-Income Workers Boosts Consumption and Wealth: Lower-income workers have seen high quits rates and wage premiums, leading to increased spending and net worth gains, particularly in housing, fueling a consumption-driven economy.
The American labor market, particularly for those at the lower end of the income ladder, has provided significant leverage to workers through high quits rates and wage premiums for leaving jobs. This has contributed to a consumption-driven economy that has outperformed expectations, with Americans continuing to spend despite economic downturn predictions. Additionally, the bottom half of Americans have experienced greater than inflationary gains in their net worth, particularly in housing, which has improved their financial situation. However, this trend towards wealth accumulation creates a tension with the housing market, which disproportionately benefits those who already own homes and have locked in low interest rates. This pro-housing, pro-wealth dynamic can be seen as a somewhat pro-inequality story contrasting the earlier discussed anti-inequality elements of the labor market.
Economic Volatility and Its Impact on Voters: Economic volatility, despite some positive signs, could outweigh positives in voters' minds due to challenges faced by non-homeowners and uncertainty surrounding the economy's future.
The current state of the economy, while showing some positive signs, is also experiencing significant volatility which could negatively impact voter perceptions. Homeowners are experiencing a positive wealth effect due to old mortgage rates, but non-homeowners face challenges with rising housing costs, real wages, and gas prices. While the economy may be slightly net positive, the volatility could outweigh the positives in voters' minds. Despite Biden's efforts to make a case for his economy, Democrats' polling on the economy is not strong, and it remains to be seen how much the economic conditions will impact the upcoming elections. The volatility of the American economy, similar to a roller coaster ride, could lead to voters paying less for it, just as they would for a volatile financial asset. Ultimately, the outcome of the election may come down to a small group of voters in key states, making the economic conditions a significant factor.
Uncertainty in Q4 for Corporate America: While Q3 earnings are strong, Q4 could present challenges due to external factors like oil prices, student loan debt, and higher interest rates
While Q3 earnings are expected to be strong, the real test for corporate America might be in the 4th quarter due to external factors such as oil prices, student loans, and higher interest rates. During the latest episode of "Unhedged," Rob Cox expressed his optimism about Q3 earnings, but also acknowledged the uncertainty surrounding future guidance. The US economy continues to perform well, with consumers spending, but the upcoming quarter could present challenges. The conversation also touched upon the saturation of Sam Bankman-Fried and cryptocurrency-themed books, with the hosts expressing their desire for new topics to write about. Overall, the discussion highlighted the uncertainty and potential opportunities in the economic landscape. At PGIM, we provide deep global and local expertise to help investors navigate these challenges and pursue their long-term financial goals.
