Thursday , 22 February 2024

A Moderate Economic Downturn Will Crush Average Americans – Here’s Why (+2K Views)

When Congress and the Obama administration let a 2% payroll tax cut expire on8-signs-flirting-with-financial-ruin-7-savings-lg January 1 as part of the fiscal cliff deal, economists predicted a consumer retreat, [but such has not been the case – at all. It seems that] soaring housing and stock market prices are likely putting Americans in the mood for spending – but where’s the money coming from?

So writes Erica Alini in edited excerpts from her original article* posted at entitled Americans are spending, but where’s the money coming from?.

The following is presented by  Lorimer Wilson, editor of and the FREE Intelligence Report newsletter (see sample here) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.
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Alini goes on to say in further edited excerpts:

2% might not sound like much, but it does put a dent in people’s disposable incomes: For the average American household earning $50,000 a year, it means $1,000 less in spending money. Consumers, analysts said, surely were about to scale back on their trips to the mall, ignore the Amazon ads in their inbox and opt for home-brewed coffee over a Grande Latte.

Well, in January real personal consumption expenditures grew at the same pace as they had in December. In February they edged up a notch. In March they kept up the pace and by the end of the first quarter they’d risen by 3.2 per cent: well above expectations.

Could it be that people hadn’t noticed their paycheques were a few dollars lighter, analysts wondered? Perhaps the tax hike had caught families off-guard and they would need some time to adjust to their new, tighter budgets. “The reduction in personal income as a result of higher taxes … will likely slow consumer spending growth in the second quarter,” TD senior economist James Marple predicted in a research note when first-quarter results came out.

A month and a half into the second quarter, though, there aren’t many signs of that. Consumer spending data for April isn’t out yet, but growth in retail sales for the same month seems to indicate shoppers didn’t back down.

Where’s the money coming from?

1. Not from paycheques.

According to the latest jobs report, average hourly earnings are up 1.9% compared to April of last year, which amounts to 45 cents. In general, as the chart below shows, American incomes have been growing at slower and slower rates since the 1970s:


2. Not from increased borrowing.

According to the Fed, the extra cash isn’t coming from stepped-up borrowing either. Americans are still paying off their debts. Over the first quarter, overall U.S. household debt shrunk by 1%, to the lowest level since 2006: TOTAL DEBT BALANCE AND ITS COMPOSITION

3. It’s coming from savings.

This only leaves—you got it—savings. In January, households’ savings rate tumbled to 2.3%, down from 6.5% in December and 4.1% in November. It hasn’t climbed back up since. In March, the latest available reading, it stood at 2.7%, the lowest it’s been (excluding January) since December 2007:


Current savings rate too low to cope with even a moderate economic downturn!

Even if Americans keep paying off their debt, such a low savings rate is problematic. If it persists, too many U.S. families will have too small a cushion to be able to cope with even a moderate economic downturn, which, given the state of the global economy, could happen sooner than many expect. Even if Americans go back to living paycheque-to-paycheque, there’s only so much they can spend without relying on credit card debt and home-equity lines of credit.


In the absence of loose credit, consumer spending in the U.S. will be pegged to incomes—and there doesn’t seem to be much growth potential there.

(Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.)


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One comment


    This says it all, the Central Banks are enabling the BIG Banks (by providing them paper money at almost zero interest) to keep interest rates high for all borrowers that are lucky enough to be able to qualify for a loan these days which includes Seniors on a fixed income who cannot now refinance their home mortgages, even if they have a perfect track record of payments!

    and the borrowers are helpless to get the CHANGE they need!