Vulnerability in US Lower Income Brackets Poses Economic Risk

There are lies, damn lies, and then there are statistics. This famous saying popularized by American humorist Mark Twain aptly describes the current use of economic statistics to paint an overly rosy picture of the American economic health.

“Too often, we rely on aggregate numbers or averages which camouflage the uneven distribution of economic progress (or lack thereof) among lower income families. For instance, the use of aggregates in calculating GDP masks the fact that those economic gains remain heavily skewed toward the rich, Sheila Bair wrote for Yahoo Finance.

Similarly, the use of averages in reporting wage gains conceals distortions caused by booming wages among higher paid workers and the fact that by traditional measures, hourly real wages for most middle-class workers have slightly declined.

This same type of distortion was at work in some recent Wall Street analysis of statistics released by the New York Fed on household borrowing. The NY Fed reported that household borrowing had hit a new peak of $13.29 trillion in the second quarter of 2018, far surpassing its peak of $12.68 trillion in the frothy years preceding the financial crisis.

Some analysts argued that this was actually good news because while household borrowing was up, so was consumers’ disposable (after-tax) income, which hit $15.46 trillion in the second quarter.

This put the debt-to-income ratio at 86%, significantly lower than its all-time high of 116% in 2008 at the peak of the housing bubble. Thus, American households were financially healthy and had plenty of room to borrow even more, or so the argument went.

  More Trouble Paying Off Debt

It is true that household debt in nominal dollars doesn’t tell you whether American households are over-extended without comparing that debt to the income available to repay it.

However, to use the go-go years leading up to the crisis as the benchmark for sustainable rates of household borrowing is questionable, to say the least. In fact, household DTI’s were substantially lower than today’s levels throughout the post-war years.

It wasn’t until the early 2000 that they started to escalate with the subprime lending craze. So by historical norms, even at 86%, household DTIs are quite high.

More importantly, aggregate debt-to-income ratios tell us little about the affordability of that debt among various income levels.

Rich people may be borrowing a lot but then, they can afford it. Lower income households living near subsistence have scant capacity to absorb any debt. Unfortunately, detailed data about household borrowing among income groups is notoriously difficult to obtain.

The New York Fed does provide some data on household debt growth rates by income level. This data show that non-mortgage household borrowing (primarily credit cards, auto and student loans) has grown significantly over the past 5 years among lower income families, while mortgage loans have declined.

Mortgage lending standards have tightened since the crisis, but now those families may be getting in over their heads with non-mortgage borrowing. Indeed, non-mortgage debt has grown by a whopping 38% over the past 5 years and its ratio to disposable income is even higher than during the pre-crisis years.

  Huge Skills Gap

The US manufacturing sector is booming—adding 350,000 jobs since President Donald Trump took office in January 2017. But while a strong economy is helping to bolster the industry, it’s also being crunched by an increasingly tight labor market, leaving companies in short supply of workers they desperately need to meet capacity, CNBC reported.

Due to a combination of economic expansion and baby boomer retirements, the Manufacturing Institute projects that by the year 2025, some two million jobs within the industry will go unfilled. The National Association of Manufacturers said about 500,000 manufacturing jobs are open. The problem, experts say, is a severe skills gap.

“One of the biggest challenges facing our sector right now is the lack of that skilled workforce to fill open jobs,” said Carolyn Lee, executive director of the Manufacturing Institute, NAM’s social impact arm. “Part of the reason for this challenge is that people don’t understand what modern manufacturing is all about—so perception is a big issue. People think of manufacturing as old and antiquated when it’s not.”

The evolution of manufacturing can be felt instantly at Rockwell Automation’s Twinsburg, Ohio, facility which is sleek and outfitted with a connected enterprise system, helping to automate procedures for workers and increase efficiency.

  Trade and Tariff Impact

Depending on the industry and the company’s import and export relationships, manufacturers stand to be hit with varying impacts from trade policy.

On one side it’s the North American Free Trade Agreement between the US, Mexico and Canada and the talks are still lingering on. And on the other side are the US-China trade tensions.

Trump’s administration was thought to be ready to place tariffs on an additional $200 billion worth of Chinese goods after the public comment period on those measures ended at 12:00 a.m. ET on Friday. Beijing has indicated any such move would be quickly followed by its own retaliation.

As those tensions threaten to spill over into more areas of commerce, some economists are predicting that the conflict between the world’s two largest economies could last well beyond the US midterm elections in November.

“I think we could see two more years of serious tension in the US-China trade relationship,” said Derek Scissors, Asia economist at the American Enterprise Institute, a conservative public policy think-tank based in Washington.