Dear Mr. Berko: We recently saw you speak and enjoyed your comments on the stock market and economy and your speaking style. Your discussion of brokers and economists was fascinating. But you were bearish on the economy! You said, "There's a 25 percent chance the U.S. will enter a recession in late 2017 or early 2018." You said that "slower home purchases and lower car sales next year" could push us into a recession. But you never told us why they'll be lower. — SA, Orlando, Fla.
Dear SA: Consumer spending — the dollars we spend daily for food, toys, vacations, clothes, entertainment — constitutes the largest component of our gross domestic product. Now a growing number of observers believe that the American consumer lacks the necessary spendable dollars to boost the economy in 2017 and beyond, which could cause higher unemployment. The consumer is debt-stuck and flat broke.
According to a poll by The Associated Press, two-thirds of Americans would have difficulty coming up with $1,000 for an emergency expense. That's a large percentage and very scary. In households making less than $50,000, 75 percent of people would have difficulty producing $1,000 to pay for a home repair, to fix their car's air conditioning, to pay a civil fine, to cover an unexpected bill or to hire a lawyer if need be. For households with income between $50,000 and $100,000, the difficulty decreases only modestly; 67 percent of those people would have trouble raising $1,000. Even among the country's wealthiest 20 percent — households that make more than $100,000 a year — 38 percent admit they would have "at least some difficulty" coming up with $1,000 in cash. This speaks volumes about the sad financial position of the consumer, whose spending is responsible for 70 percent of our GDP. Home purchases and car sales are a significant portion of consumer spending.
Consumer spending has always been the power behind our economic growth. Just prior to the Great Recession, the average household earned about $52,500 annually. Today the average household earns $50,225 — about $200 a month less than eight years ago. And that $2,275 loss in consumer spending doesn't take into account an average 1.5 percent inflation rate, which has increased prices by 12 percent since 2008. In May 2008, individual consumer debt totaled $2.45 trillion. By May 2015, consumer debt had increased to a shade under $4 trillion, and that didn't include home mortgage debt. Total student loan debt in 2008 was $575 billion, and those loans are projected to reach $1.6 trillion by the end of this year. Between 2008 and 2016, total corporate debt doubled, from $28 trillion to $57 trillion, and the U.S. national debt jumped from $12 trillion to more than $19.4 trillion. Basically, during the past eight years, borrowed money has been responsible for the growth of our GDP. Resultantly, the American consumer is more deeply in debt than at any time in history and must spend a greater portion of income on debt payments.
We may be on the verge of a car bubble. New cars can be financed for 96 months. Delinquent car loans are soaring. And 1 in 3 vehicles traded in for a new car have a negative equity. Last year, 23.5 percent of new car loans were subprime, meaning they were made to people with credit scores below 620. This year, the percentage will be larger. Delinquencies in Texas and Oklahoma exceed 14 percent, and 3.4 percent of all auto loans made last year are at least 90 days delinquent. The numbers for 2016 may be hugely larger because dealers and banks will finance cars for consumers without taking down payments.
And we may be on the periphery of a real estate bubble. In New York City, the number of contracts signed during the first quarter reached the lowest level since 2009. There's a big condo bust in Miami, and developers have begun canceling projects and cutting prices. Southwest Florida home sales are down 11.1 percent from six months ago, though prices are higher. Wells Fargo advertises home loans requiring just 3 percent down, while other lenders offer zero-down loans.
Consumers are the economic engine that moves the GDP, and most have maxed out their borrowing limits to do so. Their spendable dollars have dried up. And that may be an omen that a recession will come next year.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected] To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
Photo credit: Susanne Nilsson