Michael Feroli, J.P. Morgan Chief U.S. Economist, joins Yahoo Finance’s Zack Guzman to break down the latest U.S. consumer data.
- We're going to shift our focus over here on the show to what we already heard from the Fed in terms of what we've seen in the changes in household wealth here in the US, of course, exploding in the second quarter, up to 7%-- that was the growth-- in Q2 to hit a record. But of course, that wasn't all spread around the US evenly, and according to a new report from JP Morgan, there could still be reason for concern for those that did not enjoy in the rally, and here to talk more about that is JP Morgan Chief US Economist Michael Feroli who joins us on the phone.
And Michael, thanks for taking the time to chat. I mean, you point out in this report that it was very much a split between the haves and the have-nots. The bottom 50% of households in the wealth distribution saw their aggregate net worth increase by $179 billion in Q2 while the top 1% of households registered a $2.8 trillion with a T increase in wealth in Q2. So talk to me about what that means for the overall economy and why it's not as clear cut as the headline number might indicate?
MICHAEL FEROLI: Yeah, so I think what you see in the second quarter is that the top of the income distribution and the top of the wealth distribution has much more of their assets and financial assets in particular equities, and so their wealth situation tends to be more geared toward the stock market. And that gain in wealth was really just a reversal of the loss of wealth that occurred in, you know, in the market plunge in the first quarter.
And when you kind of look back over several quarters, even several years, what you see is pretty little change here in how wealth is being distributed across demographics. Namely the top 10% of wealth holders continue to hold about 70% of total wealth, and that's really little changed over-- over the past few years or even-- even decades. And the bottom 50% just, you know, tend to hold a very small share of wealth, and that's been the case, again, at least for-- for two decades here.
So-- so when people talk about the K-shaped recovery, you know, there's obviously something to it. I think it probably makes more sense to talk about the K-shaped recovery, though, when looking at labor market outcomes where you still have very high unemployment and lower paid occupations. But I think in the wealth-- you just were-- you just, I think, really have just reversed some of the damage done in the first quarter.
- When you talk about damage done, I mean, you can look back to the Great Recession and what was-- what was done there in terms of Americans and households dealing with debt issues, and you did note in the report that a lot of households deleveraged their own balance sheets here in terms of household wealth and debt before this crisis hit, really getting that issue under control, with one interesting caveat. You noted kind of the positioning here of millennials and how some of those moving back in with Mom and Dad should not be overlooked here, still showing about $17,000 in student debt for those that did move out. So how might that drag on the economy here when you start to lean more and more on that age group when it comes to that share growing and being a larger force of the US economy?
MICHAEL FEROLI: Yeah. So yeah, first, as you mentioned, we did have generally a pretty broad-based deleveraging. Most notably, going into the Great Recession, it tended to be lower income households who-- who saw their leverage increase, a lot of that being subprime lending. But that has reversed, and that may be one of the reasons why the stimulus worked so well in the second quarter is that those-- the stimulus checks weren't necessarily needed to pay down debt, so they could actually be used to finance new consumption.
But as you point out, the one demographic that-- that kind of hasn't joined in the deleveraging move over the past few decades-- the past decade. I'm sorry-- is those under 35. And some of that, as you point out, is student debt, and that will weigh on consumption and home-buying habits of those households.
Now, some of those-- as you point out, some of individuals-- not households, individuals-- have stayed at home, in their parents' home, and thus aren't considered households by themselves, and that is something that's been-- something that's kind of interesting, that trend really started to pick up after the Great Recession. And initially people thought, well, maybe this is just a byproduct of the weak labor market, that, you know, that younger folks-- younger adults, I should say-- are living at home. And then that didn't really change, though, until the labor market strengthened into 2019 and even just before this-- just before this latest episode, the pandemic recession.
So there does seem to be a big-- actually just a cultural shift in [INAUDIBLE] toward, you know, staying at home longer, and it doesn't seem to be so much of an economic choice. But the student debt issue has been one with us, and that probably will, at least for that segment of the population--
- And lastly, as you're talking to-- again, as kind of the whole report speaks to, this K-shaped recovery and those who are doing fine because, you know, a lot of their wealth is in stocks-- but when you look at the developments now, the latest developments on the stimulus front, when it sounds like President Trump would be willing to go up to potentially even as high as $2 trillion to meet Democrats somewhere in the middle, I mean, what does this data, to you, show about the need to get something done here versus maybe not when you think about how particularly kind of the Americans stuck here in the middle of the wealth gap have been able to, I guess, hold up a lot better than some economists had feared?
MICHAEL FEROLI: Yes, I think the-- you know, the important thing is to get the economy staying on track, staying on a healthy growth path, as it has over the past few months since the economy partially reopened. So one could say that we don't need a further stimulus, and that-- I think that's a defensible position, that we don't need it, but I do think it-- it would be a good insurance against the possibility of the economy dipping into the fourth quarter and early next year.
And I think what we're seeing in places like Europe, where they are reimposing, to some limited degree, lockdowns or other mitigation, stronger mitigation efforts, is that it is hitting fourth-quarter growth estimates in Europe pretty hard. And we don't know what this upcoming winter is going to hold, but if it does lead to a setback for the recovery, having that stimulus would be a nice insurance because we're still close to 8% unemployment, and we don't want to settle for just trend-like growth when you have a very [INAUDIBLE]. You want above-trend growth, and I think that's-- that will be the case here for-- for further stimulus.
- Yeah. We're going to get back into that in a little bit later on in the show with our discussion with Chicago Fed President Charlie Evans. But for now, we'll leave that there. Michael Feroli, JP Morgan Chief US Economist, appreciate you taking the time to