It’s strange to talk about economic problems in what the media and most Americans would agree is a booming economy. Record housing prices, record jobs, growing income, tax cuts, what’s not to like? What alarm bells could their be?
As was recently reported by the Washington Post, Americans have been spending money like crazy the last few years. Their spending has increased more than their income:
For the past two years, spending has risen faster than disposable personal income, as pointed out by Jason Furman, a senior fellow at the Peterson Institute for International Economics and a former chair of the White House Council of Economic Advisers under Barack Obama. For most of the recovery, the two measures remained relatively close. But as the labor market tightens, consumers are getting frisky even though hourly earnings aren’t growing any faster than prices right now.
Americans have almost entirely stopped saving anything:
Americans have never been the world’s best savers (our thin welfare state doesn’t exactly make it easy). But even by our own low recent standards, we’re collectively putting away an exceptionally small slice of our paychecks. In December, the personal savings rate dropped to 2.4 percent, its lowest level since 2005. Before that, the only other time it dropped below 3 percent was in Oct. 2001.
Americans are using the credit card like crazy and racking up debt at a record pace:
According to WalletHub.com, the average indebted household today carries roughly $8,600 in outstanding credit card debt. “The last time we came close was before the recession — Q4 of 2007 — and we deemed that level unsustainable at $8400,” said Jill Gonzalez, an analyst for WalletHub. “It’s not good news to start off 2018.”
In addition to record low savings and record high debt, Americans have almost nothing in their savings for emergencies or tough times. A staggering 61% of all Americans can not get their hands on $1,000 cash even if they needed to in an emergency:
According to Bankrate’s latest financial security index survey, 34 percent of American households experienced a major unexpected expense over the past year. However, only 39 percent of survey respondents said they would be able to cover a $1,000 setback using their savings.
Even worse is what appears to be the complete and wholesale destruction of the middle class. A full 75% of Americans do not have at least $10,000 in the bank. This isn’t just your typical working-class or poor working single parent, this crosses wide parts of the economic spectrum in America.
Meanwhile, younger Americans, the 35 and under crowd, are finding it almost impossible to purchase a house. Prices are sky high, and the ability to come up with a down payment is quite difficult–which isn’t hard to imagine given that 75% of people can’t even manage to save $10,000:
Listen to Ralph G. DeFranco, Ph.D, global chief economist, Mortgage Services, Arch Capital Services Inc.: “With interest rates and home prices both on the rise, first-time homebuyers – largely millennials – may want to consider making the jump from renting to owning sooner rather than late.”
In other words, everything is really expensive, and it’s going to stay expensive for a while. In fact, it might even get more expensive. And why aren’t the younger folks able to buy anything? Well, they are just flat out broke:
Relative to earlier generations, today’s cohort of young people is making less money, given their levels of education; more indebted with student loans; more likely to be underemployed; struggling harder to sock away savings; and facing shallower income-growth trajectories.
In short: Millennials want to buy houses, but they simply can’t afford to.
Meanwhile, the market for the other big ticket item most Americans will deal with, their vehicle, also is having some problems. Not only are car prices at record highs, car loan debt is at a record, and people are having a problem making that car payment, which seems to be turning into a second mortgage given how high car prices have risen:
The US closed out 2016 with just shy of $1.2 trillion in outstanding auto loan debt, a rise of 9% from the previous year and 13% above the pre-crisis peak in 2005, in inflation-adjusted terms. The number of cars and trucks on the road, meanwhile, rose by only 1.5% last year, and 9% since 2005, according to US transportation department data. Total household debt levels are now a hair under their 2008 peak, with some of the fastest growth in recent years down to auto loans.
Families with median income can’t afford to buy a car:
A new analysis from Bankrate.com found that a median-income household could not afford the average price of a new vehicle in any of the 50 largest cities in the country, though cars are more affordable in some cities than others.
If you can’t afford it, finance it!
That sort of squeeze helps explain why many people are borrowing more, for longer periods of time, to finance a car purchase. Experian Automotive said that in the first quarter of this year, the proportion of new cars bought with the help of financing rose to more than 86 percent, and the average loan amount topped $30,000, which is the highest since Experian began tracking the data.
In addition to a fat car payment and impossible mortgage, don’t forget that student loan payment:
Of the more than 40 million Americans who have student debt, 5.9 million—about 14% of the total group—owe more than $50,000. That’s nearly triple the percentage who owed that amount in 2000, and it’s a share that’s continuing to grow: Among one of the most recent cohorts, the group of borrowers who entered repayment in 2014, nearly 18% owed more than $50,000.
So yes, the economy is doing well. At the same time, most Americans are facing a set of financial challenges the likes of which we have never seen before. If the economy stays strong perhaps people will find a way to manage. However, it wouldn’t take much to push people off a financial cliff, especially if they are thousands in debt and have a big fat car payment, mortgage payment, home equity line of credit payment, credit card payment, and student loan payment, on top of all the other costs of living. We’ll see how this show ends soon enough.