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The U.S. Economy Is Always One Debt Crisis Away From Collapse Lombardi Letter 2018-06-04 11:56:31 wages repo man job numbers american labor market unemployment rate employment rate wage stagnation debt crisis President Donald Trump must have had a sneak peek at the May jobs report from the United States Department of Labor. He saw that the figures reflect what appears to be a stronger U.S. economy. More jobs, however, mean little when the U.S. economy continues to drown in debt. Analysis and Predictions 2018,Inflation,News,Stock Market Crash,U.S. Economy,World Politics https://www.lombardiletter.com/wp-content/uploads/2018/06/iStock-912417720-150x150.jpg

The U.S. Economy Is Always One Debt Crisis Away From Collapse

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U.S. Economy One Debt Crisis Away from Collapse

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More Jobs Mean Little When U.S. Economy Continues to Drown in Debt

President Donald Trump must have had a sneak peek at the May jobs report from the United States Department of Labor. He saw that the figures reflect what appears to be a stronger U.S. economy.

Thus, we might forgive his excitement—and the fact that he sent a hint to the markets an hour before the report was officially released. The “Tweeter in Chief” could not hold back on his enthusiasm. (Source: “Trump Breaks Protocol With Jobs Report Tweet Before Data Is Released,” The New York Times, June 1, 2018.)

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At first glance, the job numbers are good. They suggest that the American labor market continues to build momentum, having added 223,000 jobs to the U.S. economy in May. The numbers beat analysts’ expectations by 33,000.

Many Jobs, Just Not Enough Money

For the past year, an average of some 190,000 jobs a month are said to have been created. The U.S. economy has, essentially, been growing for the past 92 consecutive months. Simply, the U.S. economy has experienced one of the longest growth phases ever. (Source: Ibid.)

The unemployment rate, meanwhile, also suggests that the U.S. economy is experiencing a favorable trend. It was 3.8% in May. This is the lowest unemployment rate since December 2000.

Perhaps more indicative of the U.S. economy’s apparent ability to create jobs is that the unemployment rate has not been this low since 1969, when U.S. car manufacturers were operating at full strength. (Source: “US employers keep on hiring despite growing trade concerns,” Associated Press, June 3, 2018.)

And that’s the good news. A closer analysis of what’s happening around the favorable jobs growth scenario tells a different tale.

A Sordid Tale of Wage Stagnation

The most significant issue remains wages. Unemployment being as low as the statistics suggest implies that employers have been facing more difficulties in hiring workers.

In the free market system, shortages mean higher costs. If the oil industry cuts production, drivers face an immediate sting as they have to pay more for the same gallon of gasoline at the pump.

Despite this basic, and entirely reasonable concept, wages have not increased. The most optimistic reports claim that wages have risen slightly: about 2.7% annually since Trump became president. (Source: “U.S. job growth surges, unemployment rate falls to 3.8 percent,” Reuters, May 31, 2018.)

The job growth numbers that have filled President Trump with pride have also left most Americans vulnerable to another consumer debt crisis. In other words, most Americans could lose everything in the case of a financial shock, sparking another debt crisis.

If wages remain stagnant while real costs increase, the outcome of the so-called job growth will be to increase chances that American workers will struggle financially.

False Optimism

Job growth creates a sense of optimism. And there’s nothing wrong with that; optimism is one of the engines of the U.S. economy. But there’s a fine line between optimism and exuberance.

Exuberance, from the perspective of a strong wave of rising employment after a devastating recession, has led to the resumption of spending. After months or years of hardship, workers who finally start new jobs are prone to taking on more consumer debt.

Their newly established employment status allows them to secure more credit at financial institutions, especially where alternative or subprime lenders are concerned.

The Return of the Repo Man

Many newly re-employed Americans have developed a justifiable desire for a new automobile (who can blame them, given the constant commercials?).

Many of those people have discovered, or are about to do so, just which career path has become one of the fastest growing in the U.S. economy.

The name is “repo man,” a person who repossesses cars and other big-ticket items that consumers bought on credit before failing to keep up with the payments. In some cities, the number of repossession professionals has more than doubled since 2014. (Source: “The surprising return of the repo man,” The Washington Post, May 15, 2018.)

The rising demand for repo men paints a rather less-flattering portrait of the U.S. economy than does the May job report.

Rather than seeing job growth (and certainly not seeing higher average wages), the U.S. economy has been driven by the return of alternative borrowing. And the demand for cars, no doubt enhanced by ride-sharing companies like Uber, has surged.

And if it’s not yet time to call the repo man, the banks report that more than four percent of all auto loan holders were late in their payments in 2017. The auto loan delinquency rate hasn’t been this high since 2012. (Source: Ibid.)

Blame what are, in effect, lower wages and rising consumer costs.

And, of course, it’s no surprise that if tax season makes repo men less conspicuous (because many Americans receive tax refunds), news of layoffs at big companies usually causes a surge in business for the repo man.

Consider that U.S. consumers took on an additional $63.0 billion in debt in the first quarter of 2018 alone. (Source: “Will Slow Wage Growth Create Another Consumer Debt Crisis?” NBC News, June 1, 2018.)

Wages and Economic Growth in America Don’t Match

The bottom line is that wages are hardly keeping up with economic growth. They’re rising at a much slower pace than previous recoveries or post-recession periods.

Perhaps if American employees, especially those requiring special skills or experience, start quitting their jobs, it will bring employers’ attention to the fact that salaries need to increase.

But how many employees have the courage to do this—that is, leave a job voluntarily? It takes guts. It’s a risk to remain without work when you have the recession that began in 2008 as a reference.

The Federal Reserve and many economists consider two percent to be the ideal inflation rate. The Fed would use that percentage to justify raising the interest rate.

Ironically, raising the interest rate—which demands a great deal of confidence—is the one single element that could trigger a debt crisis. It would also make the federal debt harder to service, given the tenuous macroeconomic picture.

Indeed, the growing debt and stationary wage problems are intensifying in a period of higher geopolitical tensions in the Middle East and Russia, rising oil prices, and a precarious situation for stocks on Wall Street.

Economic Crisis in 2018?

The U.S. economy would appear to be heading toward an economic crisis in 2018.

It’s not all the lenders’ fault. Many businesses have accumulated more debts over the past few years, instead of paying off existing ones.

Similarly, the Trump tax cuts have not created many “good” jobs, in the sense that, if many companies have offered nominal wage increases at first, they have not invested in hiring more people. The Trump tax cuts have become the Trump stock buybacks.

Some say that higher interest rates are necessary to encourage failing businesses from throwing in the towel and shutting down. New ones can take their place.

Yet, the risk appetite and credit situation must also be convenient enough to encourage new risk-taking. In practice, the risks remain too high.

Thus, the Federal Reserve appears to have postponed raising the nominal interest rate.

Perhaps, like many American wage earners, the Fed has realized that inflation has not reached a high enough level to start pulling back on credit now. The U.S. economy has not achieved a strong enough level yet.

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