Something feels amiss, creating a challenging environment for many Americans.
The typical worker, despite clocking in their 40-hour week, finds themselves financially strained. Inflows of cash frequently fall short of outflows; expenses outpace earnings. How can this be the case?
The Bureau of Labor Statistics reports an unemployment rate of 3.5 percent, close to an all-time low.
With nearly everyone employed and drawing a paycheck, shouldn’t consumers be thriving? Shouldn’t they be reducing debt and paying off credit card bills monthly? Shouldn’t they be setting aside savings for future needs?
Instead, many consumers are grappling with financial stability. Households are exhausting their resources, spending beyond their means, leaving them with an increasingly dire situation.
For instance, the rate of severe delinquency on auto loans has reached a 17-year high. Severely delinquent loans are defined as those more than 60 days overdue, while defaults refer to loans that are over 90 days late.
Typically, an increase in delinquent loans aligns with rising unemployment rates. However, the job market remains robust, yet delinquency rates are reminiscent of 2006 levels. What could be the underlying cause?
One possible explanation is that escalating credit costs, in tandem with rising consumer goods prices, are squeezing borrowers. Faced with hefty payments alongside soaring costs for essentials like food, gas, and housing, many Americans find they run out of funds before payday.
To bridge the gap, they accumulate more debt, even with the unemployment rate holding steady at 3.5 percent. This inconsistency suggests a faltering economy.
Heavy Burden
This pattern of expenditures surpassing income is vividly illustrated in the new car market, where both purchase prices and financing costs have seen unrelenting increases.
Cox Automotive recently reported that the average monthly car loan payment is now over $750, with an interest rate of 9.5 percent. Additionally, it now takes 42 weeks of average income for a typical American to purchase a new vehicle, up from 33 weeks pre-pandemic.
Moreover, in Q1 2023, about 17 percent — or one in six — new vehicle loans exceeded $1,000 in monthly payments. While $1,000 in 2023 isn’t what it used to be a decade ago, it remains a significant monthly obligation next to food, housing, and utilities.
For such an amount, one could instead hire a fair number of Uber or Lyft rides without the burden of a long-term car loan. Consequently, the immediate stress of financial obligations may outweigh the inconvenience of not owning a vehicle.
Admittedly, we typically criticize the concept of perpetual renting — a notion pushed by global elites suggesting that one will own nothing and be content. Nonetheless, spending $1,000 a month on parking a vehicle is unreasonable.
It’s essential to consider these factors before committing to a substantial car payment.
Escalating Credit Card Debt
Car loans aren’t the sole debt issue; credit card balances are also spiraling unmanageable levels.
Recently, credit card debt surpassed $1 trillion for the first time, and the average interest rate has climbed past 20 percent.
These trends have resulted in an unprecedented shift: for the first time, more Americans are carrying credit card debt over month to month than those who manage to pay it off in full each month.
A survey from J.D. Power indicates that 51 percent of Americans are unable to settle their entire monthly balance, allowing it to roll over and accrue interest. Throughout the five years leading up to 2022, the percentage of credit card users rolling over their balances fluctuated between 40 to 50 percent.
Clearly, some systemic issues are at play. Consumer price inflation, depleted savings, and rising interest rates are all contributing to ballooning credit card balances. Regrettably, there appears to be little hope for these debtors to extricate themselves from these financial binds.
Excessive reliance on credit cards often results from a median income that no longer supports a standard middle-class lifestyle. An unemployment rate of 3.5 percent holds little significance when wages do not keep pace with inflation.
The Bureau of Labor Statistics shows that the average median weekly earnings for full-time workers was $1,095 in Q1 of 2023, translating to a median annual income of only $56,940.
If rent is $2,000 per month and the average car payment is $750, that adds up to $33,000 a year just for housing and transportation. Once utilities, gas, food, and various taxes are factored in, disposable income dwindles rapidly.
What transpires when an unexpected medical emergency arises? For example, in the event of a sudden appendix rupture, one could easily accumulate unavoidable debt.
Furthermore, student loan repayments are set to resume in October. How will individuals afford to service these debts?
Debt and Its Consequences
Day-to-day debt isn’t inherently negative; borrowing for investment in a rental property or a small business, if managed wisely, can bring prosperity. When used judiciously, debt can be a tool for wealth creation.
However, consumer debt operates on a different playing field. It rarely contributes to lasting wealth and instead fosters ongoing financial hardship.
Consumer debt represents the most detrimental kind of borrowing, robbing from the future while compromising one’s financial horizon.
While some debt can yield pleasurable experiences, such as travel, what’s deemed reasonable? Financing a luxury purchase without cash is ill-advised. If it’s unaffordable in cash, it’s likely not sustainable to buy on credit.
There’s also a pragmatic aspect to incurring consumer debt for critical expenses like children’s school supplies. Such expenditures can generally be managed responsibly, allowing individuals to pay off outstanding balances over time.
However, when sporadic expenses morph into a monthly routine for survival, the situation escalates into chaos.
This dilemma mirrors the reality many working Americans currently face, one exacerbated by reckless government policies linked to rampant money printing, manipulated interest rates, and extensive intervention strategies.
The repercussions of this financial mismanagement are bound to be significant.
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Sincerely,
MN Gordon
for Economic Prism
