American consumers' wallets are running dry while corporate profits soar; the K-shaped divide is becoming unsustainable.
- In April, the US personal savings rate fell to 2.6%, a four-year low, and has halved over the past year. Aside from a single month in June 2022, this is the lowest level since 2008. Taking a longer historical perspective, excluding 20 months between 2005 and 2008, the consumer savings rate has dropped to the lowest level on record since the 1950s.
- Inflation, fueled by rising energy prices, has outpaced wage growth for the first time in three years. Americans are quickly depleting their savings to maintain spending, a pattern that is clearly unsustainable. At the same time, some closely watched consumer confidence indices have fallen to historic lows, suggesting that household consumption—the most critical pillar of the economy—may soon face enormous pressure.
- Yet US stocks continue to hit new highs. Data shows that in the first quarter, the share of US corporate profits relative to output rose to 18.4%, the second highest level since the 1940s. Pre-tax profits as a share of GDP also remain near a record high of almost 14%. Corporate profitability is at an unprecedented level, while the financial situation of most Americans grows increasingly fragile.
- Economists point out that this trend is unsustainable both economically and politically. Mortgage analysts estimate that the top 10% of income earners account for 35% to 40% of all consumer spending and hold 90% of US equities. In the past 12 months, US stocks have risen by 30%, allowing asset holders to continue supporting overall spending, but this masks the multiple pressures faced by the bottom half of the population from inflation, rising borrowing costs, and depleted savings.
- In the first quarter, the share of auto loans overdue by more than 90 days rose to a record 5.6%, while the credit card delinquency rate reached 13.1%, the highest since 2011. The key question is when the lower tier of the K-shaped economy will drag down the entire economy. Price pressures triggered by Trump's tariff rhetoric have already caused the president's economic approval rating to plummet. If the savings buffer disappears and the average person's spending becomes unsustainable, political backlash could arrive ahead of the midterm elections.
Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.
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