Gross National Product (GDP) hitting 4.1 percent in the second quarter of 2018 means the U.S. has had the fastest round of economic growth since 2014. However, the source of that growth shows that our economy is actually very unhealthy and a major crash may be right around the corner.
MarketWatch remarked on the surge in consumer spending in January, reporting that while household buying had reached levels not seen since 2011, those same households were rapidly spending down their savings. The January report also pointed out that Americans buying more cars and trucks and eating out more was likely a signal of strong consumer confidence, spurred by an unemployment rate just over four percent and healthy stock markets.
However, the trend of working-class Americans driving consumer spending to new highs by depleting their savings accounts has now transitioned to working-class Americans driving nearly all economic growth by taking on debt they can’t repay.
With the Federal Reserve expected to raise interest rates as soon as September and other central banks around the world following their lead, the consumer spending bubble created by poorer Americans steadily taking on higher debt loads to keep their heads above water may pop by the end of 2018. Signs of a crash are already here, as home sales in Southern California plummeted by almost 12 percent between June of 2017 and June of 2018. As CNBC noted, the California housing market is often a predictor of trends for the national housing market.
Earlier this week, Reuters published an analysis finding that most economic growth in the U.S. since 2016 has come from the poorest 60 percent of income earners paying for things by going deeper in debt. This is a stark departure from past decades of consumer spending growth, which was historically driven by the wealthiest 40 percent of Americans. In January, Deutsche Bank economist Torsten Slok found that the percentage of families with more debt than savings was higher in 2018 than at any point in U.S. history since 1962 — including the Great Recession of the late 2000s.
In the five years leading up to 2017, expenses outpaced pre-tax income for most working-class American households, while the wealthiest Americans saw their wealth dramatically expand. This is likely due to a long trend of costs steadily rising while wages remain stagnant, and the richest enjoying a tax code that overwhelmingly benefits them.
The dire economic circumstances faced by millions of working-class Americans is best exemplified in the housing market. The National Low-Income Housing Coalition’s “Out of Reach” report for 2018 discovered that there’s no city or county in any of the 50 states where someone making minimum wage can afford a two-bedroom home. Someone making the federal minimum wage of $7.25/hour would have to work 122 hours each week (out of 168 total hours in a week) to afford the average two-bedroom home, and 99 hours each week to afford the average one-bedroom apartment at fair-market rent.
But even with municipalities and states slowly implementing a $15/hour minimum wage, living costs are still too high for most workers — even those working multiple jobs — making debt the only remaining option to stay afloat.
As the Grit Post editorial board noted in June, while the job market may be healthy on paper, most new jobs are in low-paying industries, meaning Americans have to work multiple jobs in order to meet monthly expenses. $15/hour wasn’t enough for a single adult to meet monthly expenses in more than 30 states as early as 2015. California’s minimum wage workers, for example, won’t make $15/hour until 2023.
After accounting for the combination of artificial economic growth based on poor people forcing themselves deeper into debt just to pay bills, artificially low unemployment rates stemming from more Americans taking on multiple jobs (the Bureau of Labor Statistics estimates the real unemployment rate is actually around 8.3 percent nationwide), and stock prices being artificially high as a result of companies using the Trump tax cuts to buy back shares of their own stock, American economic confidence appears to be a result of cheap parlor tricks.
This irrefutable data also pokes holes in the argument that if you shower the wealthy with benefits in the tax code, they will allow their wealth to “trickle down” to other sectors of the economy. As venture capitalist Nick Hanauer — a billionaire who made his wealth primarily as one of Amazon’s earliest investors — said in a 2012 TED talk, depending on the super-rich to use their wealth to consume drastically more than most average Americans is unrealistic and unsustainable.
The annual earnings of people like me are hundreds, if not thousands, of times greater than those of the median American, but we don’t buy hundreds or thousands of times more stuff. My family owns three cars, not 3,000. I buy a few pairs of pants and a few shirts a year, just like most American men. Like everyone else, we go out to eat with friends and family only occasionally.
I can’t buy enough of anything to make up for the fact that millions of unemployed and underemployed Americans can’t buy any new clothes or cars or enjoy any meals out. Or to make up for the decreasing consumption of the vast majority of American families that are barely squeaking by, buried by spiraling costs and trapped by stagnant or declining wages.
When looking beyond the facade, the rot of an economy caused by fundamental inequalities between the wealthiest 0.1 percent and everyone else is unmistakeable, and a crash may come in the near future unless economic inequality is radically corrected.