When it comes down to it, wealth-related economic metrics are arguably the most important when analyzing the economy. At its core, the economy is healthy when individuals, on average, are earning and spending more money, and economic livelihood is expanding. After gathering data from Q4 of the past three years, we can surmise that the economy continues expanding, albeit with some precautions. Additionally, although the full details of President Trump’s tax plan have yet to be disclosed, we can speculate that the population, as a whole, would have a lower tax burden. Assuming targeted tax credits like the Earned Income Tax Credit are not eliminated, this could lead to low-income families attaining higher levels of disposable income in order fund daily expenses. This may further stimulate growth for the various wealth metrics listed below, prompting significant increases in expenditures – leading to higher debt levels – and, potentially, better repayment of existing debts, creating a dual effect for the ARM industry depending on which of the two impacts proves stronger.
The above chart details year-over-year data for a few key wealth metrics. From an income perspective, real personal disposable income per capita, real median personal income, and median usual weekly earnings all increased during the past few years, which suggests improvement in average wages. At the same time, spending in the U.S. appears to be smoothly trending upward; real personal consumption expenditures are growing, in addition to rises in the U.S. national home price index (HPI), and retail sales. However, the median one-year ahead household income growth expectations, personal saving rate (PSR), and median one-year ahead household spending expectations have fluctuated over the observed three-year period but hovered around 2.7%, 5.8%, and 3.7%, respectively. This may be due to stagnancy in the Federal Reserve’s (Fed) policies, primarily maintaining historically-low interest rates following the Great Recession. Recently, the Fed raised its rates twice – once in December and another in March – suggesting a more optimistic economic outlook; however, rates still maintain relatively low levels. If they continue raising rates as expected, we should see a slowdown in overall spending and an increase in savings – both of which may be significantly impacted by President Trump’s economic policies.
One major wealth-related concern, however, is the Gini index – a metric that measures the level of income inequality in a country – which has been growing steadily over the past few decades (our “Fading American Dream” blog). Average data (i.e., using the “mean” calculation instead of “median”) can easily deceive the large gap between rich and poor since the mean may be highly skewed by outliers for the extremely wealthy or incredibly poor. . As we stated in our above-mentioned blog, the continuation of this trend may lead to both positive and negative outcomes for the ARM industry, but it’ll undeniably be burdensome on an increasingly-large number of U.S. residents.
Nonetheless, after examining the presented data and considering other non-wealth-related metrics, such as consumer sentiment and non-employment indexes, we are confident that national expenditures will continue to increase.
With regard to the ARM industry, we believe the data presented above provides an optimistic outlook. Additionally, assuming – income that is adjusted for inflation – continue to rise and outpace people’s costs of living, then we should expect borrowers to be more likely to repay existing debts since they now have excess funds. However, the Trump administration promises to implement substantial changes to healthcare and federal income tax policy, among other things, which may significantly alter the economy’s current trajectory.
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