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1. Has The Bottom-80% Of Households Bled Through Their Savings? It Appears So.

• While all income groups have seen their savings rates decline over the last two-plus years, the bottom 80% has seen it sink into negative territory.
  
• This implies they are spending more than they’re saving as higher interest rates, inflation, and weak wage growth eat away at their capacity to save anything.
  

What you need to know: According to the latest Wells Fargo special commentary¹, saving rates by income reveal that households in the bottom 80% bracket have been saving at negative rates for nearly two years, according to Moody’s. This means they have been consistently spending more than they earn each month.

Why it matters: Households were juiced up on excess savings – a whopping $2.1 trillion peak amount in August 2021 – thanks to government stimulus for the COVID-19 pandemic. However, research from the Federal Reserve Bank of San Francisco² shows that U.S. households have depleted all the excess cash they accumulated during the pandemic. This will likely have big implications on household balance sheets and consumer spending (to the downside).

Now the Dunham Deep Dive: Most households had a nice rainy-day fund after all that pandemic stimulus – but now it’s seemingly gone. And the data shows it’s getting worse.

Put simply, according to the evidence, the bottom 80% of U.S. households (comprising roughly 270 million people) had a negative savings rate over the last two-plus years – indicating they have spent more than they earned.

Of course, you may be wondering, “How can you have a negative savings rate?”

Well, they could do this because they depended on drawing down the excess pandemic savings they built up as well as using credit cards and other forms of debt (allowing them to consume more than their incomes justified).

But don’t forget, this was always finite.

Now households (specifically the bottom 80%) are dealing with an evaporated pool of savings, significantly higher debt burdens, delinquencies surging to decade highs, and a weaker job market.

Making matters worse, the percentage of disposable income (after-tax take-home money) being used to service all this non-mortgage-related debt (auto loans, credit cards, etc) is at its highest level since – you guessed it – 2007-08.

As Wells Fargo noted, “Until the existing credit gets paid off though, personal interest expense could crowd out other spending.”

The U.S. consumer may finally be running out of steam.

And this is most definitely something worth monitoring.

2.  The Home Mortgage Market Is Signaling A Severe Recession Amid Plunging Activity 

• Mortgage activity – such as mortgage applications and refinancing – are at multi-decade lows.
  
• High prices and high interest rates have killed demand for mortgages and squeezed would-be buyers to the limit.
  

What you need to know: The latest data from the Mortgage Bankers Associations of America (MBA) show that both mortgage purchase applications³ and refinances⁴ are at or near multi-decade lows - marking one of the worst mortgage downturns in history – implying that the housing market is stuck in a rut.

Why it matters: Many would-be sellers can't afford to sell and buy something else at current prices or higher interest rates (since most refinanced when interest rates were below 3% back in 2020-21). And many would-be buyers are dealing with the same problem (overpaying for both a home and a mortgage). Because of this, the mortgage sector is reeling amid the sharp slowdown across the industry.

Now the Dunham Deep Dive: The housing market data continues to just get more interest.

Long story short, the U.S. housing market is essentially stuck.

On the one hand, there are too many homeowners who don’t want to sell and give up their sub-3% 30-year mortgage (which is a huge asset in this higher interest rate environment). And they also don’t want to take out the home equity through a HELOC (since they would be paying near-7% for it).

Then, on the other hand, would-be home buyers are priced out of the housing market because they’re trapped between stubbornly high home prices and high mortgage costs.

• The average home price sold is nearly 40% higher compared to 2019 and the average interest rate is nearly 50% higher than before – so home buyers are really feeling this here.

I remember an old saying from a mortgage broker: “When the economy is good, people buy houses. And when it’s bad, they refinance. It’s still a win-win for us.”

For instance, during the 2007-12 housing bust, purchases fell off a cliff but refinances kept going.

The problem today is that it’s become a lose-lose as home purchases and refinances have both plunged.

More interestingly is that mortgage lenders – according to the MBA⁵ - have been reporting heavy losses since Q2 20222 (up until the latest available data of Q4 2023) – see the chart below.

You may be wondering, “How are banks losing so much money when mortgage rates are higher? Shouldn’t they be making more from interest?"

Well, something many may not be aware of, banks are high-volume businesses (aka “churn and burn”), not high-interest rate businesses. This means they write loans and quickly package them up and sell them off to Wall Street or buyers wanting yield (they generally don’t hold the actual mortgage loan themselves).

Thus, as the volume for mortgage-related loans evaporates, so do earnings.

It might be time to keep a close eye on mortgage lenders. . .

3. China Hits Record Trade Surplus – Raising Alarms For Global Economy

• Chinese exports soared to their highest level in nearly two years, while imports sank.
  
• China’s factories have launched an export blitz, sparking global concerns about the potential impact on other economies. 
  

What you need to know: China’s formidable exports surged in June, reaching $308 billion—the highest level in almost two years and expanding for the third straight month—according to China’s customs administration⁶. However, imports fell to $209 billion as Chinese companies and households grew more cautious with their spending. This resulted in a record monthly trade surplus of just over $99 billion.

Why this matters: For the Chinese government, the growing trade surplus is welcome news. Consumers in distant markets are buying many goods that Chinese households no longer want or cannot afford, keeping factories open and fueling the construction of even more factories as part of a national strategy to boost industrial output.

However, China's soaring trade surpluses have alarmed many foreign capitals. Officials worldwide fear that Chinese exports will displace their own industrial output, leading to factory closures and stunted economic growth. In response, governments in the United States, the European Union, Brazil, India, Turkey, Indonesia, and other countries have recently raised tariffs or imposed new ones on Chinese manufactured goods.

Now the Dunham Deep Dive: China continues to suffer from economic malaise – especially as consumption remains lethargic (clearly since imports have remained weak).

• Remember, when consumption is stronger, imports are usually higher than exports (think the U.S.), and when consumption is weaker, exports often exceed imports (like China, Japan, and Germany).

Now, this shouldn’t come as a surprise, as I shared with you in late 2023 that China’s consumers would remain stalled amid declining real estate prices, a weak job market, and teetering banks.

But it’s halfway through 2024 and things still appear to be going nowhere – even with Beijing stepping up government support.

So, why isn’t China’s economy rebounding?

Because there’s a lack of consumer confidence. . .

See, consumers spend when they believe their incomes and wealth will continue to grow. But once that confidence is shaken, they scale back and save for a rainy day, deferring consumption and creating a negative feedback loop: less consumer spending leads to fewer business sales, lower profits, reduced hiring, and further economic decline.

Because of this, China continues trying to export its way out of the slump by dumping its surplus of unconsumed goods abroad. However, the rest of the world is cautious, fearing this will crowd out their own manufacturing sectors.

Just to highlight this. . .

• In the first half of the year, China faced 64 anti-dumping investigations from trading partners, a 166% increase year on year, according to China Trade Remedies Information⁷, a platform under the Ministry of Commerce. Additionally, China has encountered 13 anti-subsidy investigations, nearly 3 times the number from the same period in 2023.

As I’ve continued to warn you about over the last few months – expect a global trade war to amplify as the “China Disease” risks infecting the world economy.

Put simply, China needs to import more from the rest of the world and export less (since importing more means other countries are exporting more, which is what they want).

But for this to balance out, the Chinese consumer needs to step up – which I still believe isn’t likely (for now).

So keep an eye on that.

Anyways, who knows what will happen? This may just be noisy data.

As usual, just some food for thought.

Have a great rest of your weekend.

Sources:

1. Wells Fargo - Still Unstoppable? The U.S. Consumer in Five Charts (bluematrix.com)
2. US Pandemic-Era Savings Have Finally Been Spent, San Francisco Fed Study Finds - Bloomberg
3. United States MBA Purchase Index (investing.com)
4. United States Mortgage Refinance Index (investing.com)
5. IMBs Report Net Production Losses in the Fourth Quarter of 2023 | MBA
6. China’s Record Trade Surplus Risks Worsening Tensions With US - Bloomberg
7.  China’s trade landscape a battleground, as data shows tariff duels to escalate with WTO hamstrung | South China Morning Post (scmp.com)

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