Much like Australia, the US appeared to flourish financially during the pandemic. But now their economic reality is showing – and it isn’t pretty.
As we collectively rung in the 2020 New Year, we had no idea we would soon experience a life-altering series of events, which would divide our lives into two separate eras: before the pandemic and the pandemic.
In the world of economics and even everyday household budgets, a similar transformative event has occurred.
Whatever trend the economy or wages may have been on prior to the pandemic has been irreversibly altered, replaced by something new amidst the whirlwind of lockdowns and government stimulus measures.
The divided states of economic outcomes
In the United States, trillions of dollars in government stimulus and enormous intervention in markets by the Federal Reserve has created two very different recoveries for the American people.
In one, much of the middle class and poorer American households are struggling badly with a rapidly rising cost of living, negative inflation adjusted wage growth and the lingering effects of the pandemic.
In the other, upper middle class and wealthier Americans who are able to work from home are generally having a great time of things.
With interest rates at all-time record lows, wealthier Americans have seen the value of their stock market holdings rocket higher.
At the end of 2019, the total market cap of all publicly listed US stocks was $33.9 trillion USD. By the end of 2021 that figure had risen by 57 per cent to more than $53 trillion USD.
Meanwhile the total value of US residential property rose by almost 30 per cent to $43.4 trillion USD, with many popular cities recording larger price rises than the national average.
Kicking back and splashing cash
Amid this explosion in the net worth of upper class and wealthy Americans, we have seen spending on luxury items hit all-time record highs.
In 2021, luxury car maker Rolls Royce recorded the highest sales in the company’s 117-year history. They join Porsche, Lamborghini and BMW in having their best years ever.
2021 also saw a record $10.1 billion in super yacht sales, a more than 75 per cent increase when compared with the previous year.
Super yachts weren’t the only means of transportation frequented by the wealthy to enjoy record demand. According to a recent report from Forbes, over the four weeks ending Boxing Day the number of private jet flights globally was up 21 per cent when compared with the same period in 2019.
In the world of commercial aviation, however, global flight numbers remain well below pre-pandemic levels even prior to the emergence of the Omicron variant.
The challenging reality for Middle America
As a rapidly rising cost of living and negative inflation adjusted wage growth continue to bite, Americans are increasingly sanguine about the future.
According to the University of Michigan consumer sentiment survey, Americans are the least confident about the state of the economy and their household finances than at any time in the past decade, including the initial heavy shock of the pandemic in early 2020.
The same survey also revealed that roughly three quarters of Americans see inflation as the most important issue facing their nation.
In the midst of this winter of discontent for Middle America, some key economic indicators are starting to flash some rather concerning warning signs.
For example, it was expected that core retail sales would expand by 0.2 per cent in December, yet in reality they fell by 2.3 per cent.
The poor retail sales join the Markit Services index and the private ADP jobs report in surprising to the downside.
An economy running on the spending of the wealthy?
In a way, recent months have been a test for the US economy, to see that if the economy of a developed nation could be driven heavily by the spending of the wealthy and explosive asset price growth.
So far it doesn’t look good.
Despite producing a strong headline GDP growth figure in the fourth quarter of 2021, once you take out the expected build in business inventories the US economy grew by only fractionally more than 0.5 per cent for the quarter.
According to projections from the Atlanta branch of the US Federal Reserve, the first quarter of 2022 is expected to produce just 0.1 per cent growth on annualised basis, or just 0.025 per cent growth for the quarter if measured in the same way as Australia’s national accounts.
It’s not like the US economy isn’t still enjoying the tail winds of ongoing stimulus and infrastructure spending either.
During the first quarter of 2022, it is estimated that the US economy will enjoy stimulus measures worth 3 per cent of GDP, a much larger sum than the peak level of stimulus that followed the global financial crisis.
Lessons for Australia
In Australia we have arguably enjoyed a far greater level of stimulus than the United States relative to our respective experiences with the virus.
With $507 billion pledged by the Morrison government and billions more from the various state and territory governments, the Australian economy has been boosted by an unprecedented cash splash.
Now with the impact of that support expected to fade significantly in 2022, the economy will be looking for other drivers to lean on as the recovery from the pandemic continues.
One factor that has frequently been put forward as potential driver of future growth is households spending the $245 billion in savings they have accrued during the pandemic.
However, according to data from banking regulator APRA, there is little evidence yet of households drawing down their savings.
Like in the United States the lion’s share of these enormous household savings are held by more well off households.
Whether we will have any more luck than the Americans in relying on wealthier households to drive growth in 2022 remains to be seen.
Ultimately, Australia is not America and our experience may differ significantly, but perhaps there is a lesson there for us too.
Tarric Brooker is a freelance journalist and social commentator | @AvidCommentator
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