Thursday, August 09, 2018
Reuters Analysis Says Booming Economy is Fueled by Debt Incurred by Bottom 60 Percent
On July 23, an analysis of U.S. household data by Reuters demonstrates that the roaring job growth and consumer spending over the last two years is being generated, not, as in decades past, by the top forty percent, but instead by the bottom sixty percent. That growth is being driven largely by those households taking on even more debt and depleting their savings.
By almost every measure, the U.S. economy is booming as the unemployment rate continues its downward trend. But as borrowing costs rise, and inflation picks up speed, plus the debated effect of the recent tax cuts recede, the engine that currently fuels the booming economy may stall.
A Change in the Source of Consumption Growth
The poorer half of this country’s citizens are fleecing their savings and piling up debt, according to a Reuters commentary, accounting for most of the rise in spending over the past two years even as their finances worsened — an anomaly when compared with the decades-old trend where the top forty percent had primarily fueled consumption growth.
As consumption makes up seventy percent of the U.S. economy, Reuters has concluded that a negative shock, such as a further rise in gasoline prices or a jump in the cost of goods from tariffs, could push those most vulnerable over the edge, which could in turn, reverse the second-longest U.S. expansion.
While the housing market is still doing well, unemployment is near its lowest level since 2000, and job openings are at all-time highs. Those on the margins may choose to work additional hours or take additional jobs rather than cut back on their spending when (not if) costs rise.
Troubling Economic Indicators
Yet, by filtering data on household finances and wages by income brackets, the Reuters analysis reveals increasing financial stress among lower-income households, which creates a disturbing trend, even as their relative contribution to the economy continues to increase.
Roughly a year ago, the Dallas Fed’s third-quarter report touched on economic indicators such as a growing economy contrasted with increased debt. Are their cautionary observations soon to come true?
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