While U.S. interest rates remain at low single-digit levels, increases could cut into consumer wage and investment income, and that could prove challenging for how much they have to spend on wine, according to a national economist.
The North Bay Business Journal talked with Gary Schlossberg, senior economist for Wells Capital Management, a fee-based, institutional money manager with more than $340 billion in assets under management. In that role, he analyzes the economic, financial and investment environment for investors as well as banking groups within Wells Fargo & Co.
Schlossberg is a member of Wells Capital’s Investment Policy and Liquidity Management strategy committees. He has been with Wells Fargo since 1974. Before that, he researched international economics for the U.S. Treasury Department and Federal Reserve Board.
In conjunction with Schlossberg’s presentation on the U.S. and global economy at the Business Journal’s Wine Industry Conference in April, the Journal talked with him about the how deep the pockets go for consumers’ disposable income.
Wine consumption is often associated with disposable income. In the current environment, do consumers have more access to cash to spend now versus the past?
We’re in the sweet spot of an economic cycle. This one has been unique. It’s been very long, very drawn-out after the financial meltdown. A lot of it has been due to the adjustment. Rebuilding bank balance sheets, so they can lend again. Rebuilding household balance sheets.
In the labor market, not only has there been a mismatch between skilled and unskilled. The skilled portion tend to have more discretionary income and have done better in this environment. There unemployment is lower, (and) their wages have gone up more rapidly than those in the unskilled sector.
All that plays to wine consumption — any discretionary item.
We’re really late in an economic cycle, before inflation really starts to squeeze income. We’re seeing even less of inflation taking off than usual this time around, although it is starting to firm a little bit.
It’s usually this late growth-cycle stage, when people are about as flush (with funds), confidence levels are high. Just beyond this — and I think it will be more drawn-out this time around — you will start seeing interest rates moving up enough to start squeezing economic activity. Higher inflation starts to squeeze incomes.
So how far can vintners go with growth in premium wines?
It is driven by the rapid buildup in household wealth, and it really has been skewed to upper-income families. If you look at increases in wealth, we have seen very little of it in middle- and lower-income segments.
It seems to me that premium wine consumption of the kind that Napa and Sonoma are known for is driven by upper-income growth and growth in wealth, which means a spillover in consumer confidence and well-being. You’re firing on both engines right now.
Income growth hasn’t been explosive, partly because inflation hasn’t gone up that much. So there isn’t a need to match or exceed inflation. Real income growth, adjusted for inflation, hasn’t grown that rapidly in this environment.
But as interest rates rise and eventually impinge on (economic) growth, you will see a slowing in wage growth. That’s going to happen later than sooner, perhaps sometime next year.
Increasing rates could create a headwind for financial assets and risk more corrections in the market. I’m not talking about the kind of meltdown we went through a decade ago, but the rally in the market blunted on the margin.
HOUSEHOLD NET WORTH
U.S. household wealth has not only bounced back from the 2008–2009 Great Recession, it was reached new highs. At the end of last year, the net worth of the nation’s households and nonprofit organizations hit $98.7 trillion, up more than $2 trillion in just one quarter and $7 trillion over the year, according to the Federal Reserve.
The Fed calculates household net worth as the difference between total assets and liabilities.
Economists attribute this growth in household balance sheets to rising returns from the stock market and real property, according to the Wall Street Journal.
Net worth of families first hit six times disposable income in 2006, in the leadup to the Great Recession, then fell to the five-times level of the 1980s and 1990s.
The top 1 percent of income-earners saw their share of U.S. net worth rise to 39 percent in 2016 from 30 percent in 1989, according to the publication’s analysis of the Fed’s triennial survey of consumer finances.
Real average hourly wages for employees of private businesses went up just 0.2 percent in April, as rising inflation trimmed gains, according to Wall Street Journal reporting on the latest U.S. Labor Department figures.
The consumer-price index went up 0.2 percent in April, and core prices, which exclude food and energy purchses, went up at a 1.8 percent annual rate from February through April. That’s slower inflation than the annual rate of 3.1 percent for December through February.
Over 12 months, the index rose 2.5 percent, and core prices went up 2.1 percent.