Menu Our services in the selected location:
  • No services available for your region.
Select Location:
Remember my selection
Your browser is out of date.

THE MICRO FOOTPRINTS OF MACRO RISKS 

CIO Macro and Market Observations from Multi-Asset Solutions

June 29, 2022  |  8 Minute Read


Authors: Maria Vassalou, PhD and Amy Yifan Zhou, PhD


 

Household finance can provide differentiated micro-level perspectives into macro business cycles. For the moment, risks associated with household credit appear moderate compared to historical levels. But vulnerabilities on the asset side are notable. In today’s accelerated monetary tightening cycle, the risks of equity selloff and a housing slowdown are top of mind, though they will have different effects on different populations, depending on their income and the composition of their balance sheets. Ultimately, weaker consumers with diminished assets may need to tap into their credit lines, which spreads risk back to the liability side.

 

Household Debt Concerns

 

Recent evidence suggests that consumers are accumulating debt. As of Q1 2022, aggregate household debt in the US has surged to its historical record of nearly $16 trillion despite persistently higher interest rates. In other words, American households are borrowing more at higher costs. Over the past year and a half, the national average of 30-year fixed mortgage rate has increased rapidly from below 3% to almost 6%, which means monthly mortgage payments have nearly doubled.

 

On a relative basis, this level of household debt burden isn’t unprecedented. Currently, the US household debt-to-GDP ratio is about 75%, compared to nearly 100% during the Great Financial Crisis; household debt-to-income and debt service ratios are also below their historical highs. But will households hold up in an environment of high rates and volatile markets? To answer this question, we examine the size of household balance sheets and identify areas of vulnerabilities.

 

 

Exhibit 1. Household Assets by Income Quintiles (2021 Q4)

 

Exhibit 1: Household Assets

Source: Federal Reserve Board of Governors, Goldman Sachs Asset Management.

 

Exhibit 2. Household Liabilities by Income Quintiles (2021 Q4)

Exhibit 2: Household Liabilities

Source: Federal Reserve Board of Governors, Goldman Sachs Asset Management.

 

How Household Vulnerabilities May Translate Into Assets Vulnerabilities

 

The composition of household assets and liabilities is variable across demographics. For the lowest earners (bottom 20% by income), real estate accounts for about half of their assets. As we move up in income distribution, financial markets begin to play a bigger role. For the highest earners (top 1% by income), more than 60% of their assets are in corporate equities, mutual fund shares, and private businesses. Real estate for this group accounts for just 12% of assets. On the liability side, home mortgages take up the biggest share across the board, as expected; the lower earners also appear to be more dependent on consumer credit than higher earners.

 

As a result, the low- and high-income cohorts may exhibit different types of vulnerabilities with respect to macro shocks: low earners are more susceptible to home price fluctuations, whereas the high earners are more sensitive to equity market selloffs. The Fed is working hard to curb inflation with aggressive interest rate hikes. Aggregate demand is likely to cool down, and home prices are expected to appreciate less or even depreciate in the foreseeable future. For the lower earners, this implies that their asset levels can be at risk, but their mortgage liabilities are already tied to the higher prices that prevailed during the housing boom, leaving fewer resources available for consumption. On the other hand, following the year-to-date market selloffs, equity valuations have already re-priced significantly but earnings expectations have not. An earnings repricing would trigger downside risks in equities, shrinking the asset level for higher earners and reducing their willingness to consume. 

 

Furthermore, the lack of wage growth may pose additional challenges for accumulation of assets.  Record-high inflation is already outpacing aggregate wage growth, which is growing at the slowest pace within the highest-paid quartile. This isn’t good news for the high earners, for whom wages and salaries account for more than 80% of pre-tax income. Faster wage growth at the lower end alone are unlikely to provide a sufficient boost to consumption either, since wages and salaries only account for 30% of pre-tax income for the lowest income quintile1.

 

Exhibit 3. Wage Growth by Quartile (12 Month Average of Median Wage Growth)

 

Exhibit 3: Wage Growth

Source: Federal Reserve Bank of Atlanta, Bureau of Labor Statistics, Goldman Sachs Asset Management.

 

Exhibit 4. Annual Aggregate Expenditure by Income Quintiles

 

Exhibit 4: Annual Aggregate

Source: Federal Reserve Bank of Atlanta, Bureau of Labor Statistics, Goldman Sachs Asset Management.

 

The Macro Implications of Consumer Weakness

 

Overall, asset-side vulnerability suggests that household consumption is likely to weaken in the foreseeable future, although the source of pressure may be different across the income spectrum. The top 30% earners today account for half of aggregate consumption, whereas the lowest 20% earners account for less than 10%. As top earners pull back, discretionary spending is likely to be one of the earliest casualties. In turn, weaker consumption in the aggregate economy may also lead to weaker equity earnings and pose further challenges to asset returns.

 

The vicious cycle of lower consumption spending by the top 30% of earners leading to lower corporate earnings and equity returns, prompting the top earners to further constrain their consumption can continue until we see a meaningful deceleration in inflation pressures. In the meantime, lower earners can easily become distressed as they increasingly tap their credit lines at ever higher interest rates. In other words, the debt burden can deteriorate faster for the lower income cohort who has higher dependency on consumer credit. The timing of policy actions will be important for limiting the transmission of asset price weakness into credit risk, and the choices consumers make will help determine the path of the household credit cycle and the depth of any economic downturn that may result.

 

All Eyes on the Consumers

 

The above suggest that monitoring closely consumer behavior across income brackets is key in determining asset behavior going forward. In the absence of any obvious pathologies in the economy, another implication is that this time around, a recession is likely to be broad-based, shallow but perhaps harder to rebound from, as the room for fiscal and monetary accommodation may be much more limited than in previous episodes. Active, nimble investing and careful risk management would be key in navigating the current environment. 

 

About the Authors

Maria Vassalou, PhD

Co-Chief Investment Officer, Multi-Asset Solutions

Maria Vassalou, PhD

Amy Yifan Zhou, PhD

Multi-Asset Solutions

Amy Yifan Zhou, PhD

Related Insights

  • GSAM Connect

    Position For Secular Importance of Key Minerals

    18 May 2022

    The recent interplay of geopolitics, technology, and social and environmental causes is likely to have a lasting impact on energy trade patterns and the world economic order. Countries and businesses that are strategically positioned for these secular shifts are expected to gain key competitive advantage as first movers. Learn why we believe cyclical overweight to Commodity may be opportune given the supportive demand backdrop.

    Read More
  • Chinese Government Debt Demands A Decision From Active And Passive Investors Alike

    22 June 2022 A truly epochal event is well underway in capital markets: the integration of China government bonds (CGB) into the investment mainstream. The financial liberalization efforts China has undergone are paying off, leading to rapidly increasing weights for CGBs in the key benchmark indices and accompanying inflows. Given the prominence of these bond benchmarks in many investors’ portfolios, passive and active investors alike will be expressing views on China bonds, intentionally or not. Read More
  • GSAM Connect

    Debt Dynamics

    03 June 2022 US national debt held by the public, now at over $23 trillion, nearly totals annual GDP for the first time since World War II and is projected to go even higher. With interest rates rising, the sustainability of US debt is top of mind again, especially after recent pandemic-era spending contributed nearly 30% to the overall balance. In our view, US debt will likely remain sustainable even against a slowing but still resilient US economy and tighter financial conditions. Still, the pace of debt accumulation remains a critical indicator to watch. Ultimately, we believe that US debt can stay elevated so long as the prevailing macro conditions do as well. Read More

Start the Conversation

Committed to providing you with the insights you need to build your practice.

 

 

1 Wage growth: as of May 2022. Aggregate expenditure: as of 2020.

 

Disclosures

The views expressed herein are as of the date of first use as stated below and subject to change in the future.   Individual portfolio management teams for Goldman Sachs Asset Management may have views and opinions and/or make investment decisions that, in certain instances, may not always be consistent with the views and opinions expressed herein.

THIS MATERIAL DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY JURISDICTION WHERE OR TO ANY PERSON TO WHOM IT WOULD BE UNAUTHORIZED OR UNLAWFUL TO DO SO.

Prospective investors should inform themselves as to any applicable legal requirements and taxation and exchange control regulations in the countries of their citizenship, residence or domicile which might be relevant.

This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. This material has been prepared by Goldman Sachs Asset Management and is not financial research nor a product of Goldman Sachs Global Investment Research (GIR). It was not prepared in compliance with applicable provisions of law designed to promote the independence of financial analysis and is not subject to a prohibition on trading following the distribution of financial research. The views and opinions expressed may differ from those of Goldman Sachs Global Investment Research or other departments or divisions of Goldman Sachs and its affiliates. Investors are urged to consult with their financial advisors before buying or selling any securities. This information may not be current and Goldman Sachs Asset Management has no obligation to provide any updates or changes.

Views and opinions expressed are for informational purposes only and do not constitute a recommendation by Goldman Sachs Asset Management to buy, sell, or hold any security, they should not be construed as investment advice.

Economic and market forecasts presented herein reflect a series of assumptions and judgments as of the date of this presentation and are subject to change without notice. These forecasts do not take into account the specific investment objectives, restrictions, tax and financial situation or other needs of any specific client. Actual data will vary and may not be reflected here. These forecasts are subject to high levels of uncertainty that may affect actual performance. Accordingly, these forecasts should be viewed as merely representative of a broad range of possible outcomes. These forecasts are estimated, based on assumptions, and are subject to significant revision and may change materially as economic and market conditions change. Goldman Sachs has no obligation to provide updates or changes to these forecasts. Case studies and examples are for illustrative purposes only.

Past performance does not guarantee future results, which may vary. The value of investments and the income derived from investments will fluctuate and can go down as well as up. A loss of principal may occur.

United Kingdom: In the United Kingdom, this material is a financial promotion and has been approved by Goldman Sachs Asset Management International, which is authorized and regulated in the United Kingdom by the Financial Conduct Authority.

European Economic Area (EEA): This material is a financial promotion disseminated by Goldman Sachs Bank Europe SE, including through its authorised branches ("GSBE"). GSBE is a credit institution incorporated in Germany and, within the Single Supervisory Mechanism established between those Member States of the European Union whose official currency is the Euro, subject to direct prudential supervision by the European Central Bank and in other respects supervised by German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufischt, BaFin) and Deutsche Bundesbank.

Switzerland: For Qualified Investor use only – Not for distribution to general public. This is marketing material. This document is provided to you by Goldman Sachs Bank AG, Zürich. Any future contractual relationships will be entered into with affiliates of Goldman Sachs Bank AG, which are domiciled outside of Switzerland. We would like to remind you that foreign (Non-Swiss) legal and regulatory systems may not provide the same level of protection in relation to client confidentiality and data protection as offered to you by Swiss law.

Asia excluding Japan: Please note that neither Goldman Sachs Asset Management (Hong Kong) Limited (“GSAMHK”) or Goldman Sachs Asset Management (Singapore) Pte. Ltd. (Company Number: 201329851H ) (“GSAMS”) nor any other entities involved in the Goldman Sachs Asset Management business that provide this material and information maintain any licenses, authorizations or registrations in Asia (other than Japan), except that it conducts businesses (subject to applicable local regulations) in and from the following jurisdictions: Hong Kong, Singapore, Malaysia, India and China. This material has been issued for use in or from Hong Kong by Goldman Sachs Asset Management (Hong Kong) Limited, in or from Singapore by Goldman Sachs Asset Management (Singapore) Pte. Ltd. (Company Number: 201329851H) and in or from Malaysia by Goldman Sachs (Malaysia) Sdn Berhad (880767W).

Australia: This material is distributed by Goldman Sachs Asset Management Australia Pty Ltd ABN 41 006 099 681, AFSL 228948 (‘GSAMA’) and is intended for viewing only by wholesale clients for the purposes of section 761G of the Corporations Act 2001 (Cth). This document may not be distributed to retail clients in Australia (as that term is defined in the Corporations Act 2001 (Cth)) or to the general public. This document may not be reproduced or distributed to any person without the prior consent of GSAMA. To the extent that this document contains any statement which may be considered to be financial product advice in Australia under the Corporations Act 2001 (Cth), that advice is intended to be given to the intended recipient of this document only, being a wholesale client for the purposes of the Corporations Act 2001 (Cth). Any advice provided in this document is provided by either Goldman Sachs Asset Management International (GSAMI), Goldman Sachs International (GSI), Goldman Sachs Asset Management, LP (GSAMLP) or Goldman Sachs & Co. LLC (GSCo). Both GSCo and GSAMLP are regulated by the US Securities and Exchange Commission under US laws, which differ from Australian laws. Both GSI and GSAMI are regulated by the Financial Conduct Authority and GSI is authorized by the Prudential Regulation Authority under UK laws, which differ from Australian laws. GSI, GSAMI, GSCo, and GSAMLP are all exempt from the requirement to hold an Australian financial services licence under the Corporations Act of Australia and therefore do not hold any Australian Financial Services Licences. Any financial services given to any person by GSI, GSAMI, GSCo or GSAMLP by distributing this document in Australia are provided to such persons pursuant to ASIC Class Orders 03/1099 and 03/1100. No offer to acquire any interest in a fund or a financial product is being made to you in this document. If the interests or financial products do become available in the future, the offer may be arranged by GSAMA in accordance with section 911A(2)(b) of the Corporations Act. GSAMA holds Australian Financial Services Licence No. 228948. Any offer will only be made in circumstances where disclosure is not required under Part 6D.2 of the Corporations Act or a product disclosure statement is not required to be given under Part 7.9 of the Corporations Act (as relevant).

Canada: This presentation has been communicated in Canada by GSAM LP, which is registered as a portfolio manager under securities legislation in all provinces of Canada and as a commodity trading manager under the commodity futures legislation of Ontario and as a derivatives adviser under the derivatives legislation of Quebec. GSAM LP is not registered to provide investment advisory or portfolio management services in respect of exchange-traded futures or options contracts in Manitoba and is not offering to provide such investment advisory or portfolio management services in Manitoba by delivery of this material.

Japan: This material has been issued or approved in Japan for the use of professional investors defined in Article 2 paragraph (31) of the Financial Instruments and Exchange Law by Goldman Sachs Asset Management Co., Ltd.

Colombia: Esta presentación no tiene el propósito o el efecto de iniciar, directa o indirectamente, la adquisición de un producto a prestación de un servicio por parte de Goldman Sachs Asset Management a residentes colombianos. Los productos y/o servicios de Goldman Sachs Asset Management no podrán ser ofrecidos ni promocionados en Colombia o a residentes Colombianos a menos que dicha oferta y promoción se lleve a cabo en cumplimiento del Decreto 2555 de 2010 y las otras reglas y regulaciones aplicables en materia de promoción de productos y/o servicios financieros y /o del mercado de valores en Colombia o a residentes colombianos.

Al recibir esta presentación, y en caso que se decida contactar a Goldman Sachs Asset Management, cada destinatario residente en Colombia reconoce y acepta que ha contactado a Goldman Sachs Asset Management por su propia iniciativa y no como resultado de cualquier promoción o publicidad por parte de Goldman Sachs Asset Management o cualquiera de sus agentes o representantes. Los residentes colombianos reconocen que (1) la recepción de esta presentación no constituye una solicitud de los productos y/o servicios de Goldman Sachs Asset Management, y (2) que no están recibiendo ninguna oferta o promoción directa o indirecta de productos y/o servicios financieros y/o del mercado de valores por parte de Goldman Sachs Asset Management.

Esta presentación es estrictamente privada y confidencial, y no podrá ser reproducida o utilizada para cualquier propósito diferente a la evaluación de una inversión potencial en los productos de Goldman Sachs Asset Management o la contratación de sus servicios por parte del destinatario de esta presentación, no podrá ser proporcionada a una persona diferente del destinatario de esta presentación.

This material is provided for informational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. This material is not intended to be used as a general guide to investing, or as a source of any specific investment recommendations, and makes no implied or express recommendations concerning the manner in which any client’s account should or would be handled, as appropriate investment strategies depend upon the client’s investment objectives.

Confidentiality

No part of this material may, without Goldman Sachs Asset Management’s prior written consent, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient.

Date of First Use: June 29, 2022. 283296-OTU-1629035

Please enter your email address to continue reading.

Confirm Your Access


An email has been sent to you to verify ownership of your email address.

Please verify the link in the email by clicking the confirmation button. Once completed, you will gain instant access to our insights.

If you did not receive the email from us please check your spam folder or try again.