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Mortgages, auto loans and credit card debt: How the poor are fuelling the booming U.S. economy (2)

DRAINING SAVINGS

Stephen Gallagher, economist at Societe Generale, says stretched finances of those in the middle dimmed the economy’s otherwise positive outlook.

“They are taking on debt that they can’t repay. A drop in savings and rise in delinquencies means you can’t support the (overall) spending,” he said. An oil or trade shock could lead to “a rather dramatic scaling back of consumption,” he added.

Some economists say that without the US$1.5 trillion in tax cuts enacted in January spending, which has grown by around 3 per cent a year over the past few years, could already be stalling now.

They are taking on debt that they can’t repay

In the past, rising incomes of the upper 40 per cent of earners have driven most of the consumption growth, but since 2016 consumer spending has been primarily fuelled by a run-down in savings, mainly by the bottom 60 per cent of earners, according to Oxford Economics.

This reflects in part better access to credit for low-income borrowers late in the economic cycle.

Yet it is the first time in two decades that lower earners made a greater contribution to spending growth for two years in a row.

“It’s generally really hard for people to cut back on expenses, or on a certain lifestyle, especially when the context of the economy is actually really positive,” said Gregory Daco, Oxford’s chief U.S. economist. “It’s essentially a weak core that makes the back of the economy a bit more susceptible to strains and potentially to breaking.”

JOBS NOT RAISES

While the Fed expects the labour market to get even hotter this year and next, policymakers have been perplexed that wages do not reflect that.

With inflation factored in, average hourly earnings dropped by a penny in May from a year ago for 80 per cent of the country’s private sector workers, including those in the vast healthcare, fast food and manufacturing industries, Bureau of Labor Statistics figures show.

“It stinks,” says Jennifer Delauder, 44, who runs a medical lab at Huttonsville Correctional Center in West Virginia. In seven years her hourly wage has risen by about US$2 to US$14.

She took on two part-time jobs to help pay rent, utilities and a student loan. But she still sometimes trims her weekly US$15 grocery budget to make ends meet, or even gathers broken fans, car parts, and lanterns to sell as scrap metal. A US$2,000 hospital bill early this year wiped out her savings.

With inflation factored in, average hourly earnings dropped by a penny in May from a year ago for 80 per cent of the country’s private sector workers, including those in the vast healthcare, fast food and manufacturing industries, Bureau of Labor Statistics figures show.

Even so, Delauder, a grandmother, recently signed papers for a mortgage of up to US$150,000 on a house. “I’m paying rent for a house. I might as well pay for a house that I own,” she said.

Hourly wages for lower- and middle-income workers rose just over 2 per cent in the year to March 2017, compared with about 4 per cent for those near the top and bottom, while spending jumped by roughly 8 percent.

That reflects both higher costs of essentials such as rent, prescription drugs and college tuition but also some increased discretionary spending, for example at restaurants.

Economists say one symptom of financial strain was last year’s spike in serious delinquencies on U.S. credit card debt, which many poorer households use as a stop-gap measure. The US$815-billion market is not big enough to rattle Wall Street, but could be an early sign of stress that might spread to other debt as the Fed continues its gradual policy tightening.

More borrowers have also been falling behind on auto loans, which helped bring leverage on non-mortgage household debt to a record high in the first quarter of this year.

While painting a broadly positive picture, the Fed’s well-being survey also noted that one in four adults feared they could not cover an emergency US$400 expense and one in five struggled with monthly bills. This month the central bank reported to Congress that rising delinquencies among riskier borrowers represented “pockets of stress.”

That many Americans lack any financial safety net remains a concern, New York Fed President John Williams told Reuters in an interview last month. “Even though the overall picture is pretty good, pretty solid, or strong,” he said, “this is a problem that continues to hang over half of our country.”

 

Source: Financial Post
Article Link: https://business.financialpost.com/news/economy/mortgages-auto-loans-and-credit-card-debt-how-the-poor-are-bolstering-the-u-s-economy

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