This week’s Labor Department report cannot be interpreted other than as good news. The economy continues to expand. Unemployment nationwide is at 3.9 percent. Wages are up modestly over the previous year.
These are good economic times. The smart thing would be for Americans to use this opportunity to pay down debts and put themselves in a position of strength to weather bad times that, history clearly indicates, eventually will come.
Unfortunately, other indicators show people are not doing this. They are, instead, spending like crazy.
Earlier this year, aggregate credit card debt in the United States passed $1 trillion for the first time. If that figure sounds familiar in recent news reports, it may be because the value of Apple just topped $1 trillion, as well. But the differences between those two benchmarks couldn’t be starker.
Apple creates wealth through new products, employing many people. Americans who use credit cards excessively, even to purchase Apple products, incur interest payments that sap wealth, making items much more expensive than their purchase price.
CNBC reported recently that Americans spent $104 billion in interest and fees on their credit cards during the 12-month period that ended March 31. That was 11 percent more than they paid the previous year, and 39 percent more than in 2013, only five years ago.
Meanwhile, the Federal Reserve has indicated it may soon begin raising interest rates as the economy continues to strengthen. USA Today last week said Fed fund futures markets placed a 91 percent chance on an increase in September.
When interest rates rise, savers win and borrowers lose. Paying interest on all that credit card debt would become more expensive.
Other indicators show that all is not rosy. In all but 19 states, median incomes are below the income levels needed to purchase a median-priced home. A Time Magazine report found Utah among the states with the biggest gaps. The median income here is $67,481, and the income needed to afford a house is $80,807.
Should a recession come under these circumstances, many people would find themselves without the means to make credit card or mortgage payments. Default rates would rise, further inhibiting recovery.
The nation went through such a scenario a scant 10 years ago. The difference then was that Washington was able to bail out key industries to avoid the type of widespread unemployment that might have rippled through supply chains, particularly in the auto industry. Also, the Federal Reserve was able to dramatically reduce interest rates.
The federal government today may no longer have the means to provide that kind of relief, and interest rates already are extremely low.
None of this should detract from this week’s good news. During the first seven months of this year, employers added 215,000 jobs per month on average, which is ahead of last year’s strong pace. Although wages have not increased as much as expected, this may signal many companies are reluctant to spend cash, remembering the last recession. That might provide somewhat of a hedge against bad times.
But for average Americans, the way forward should be clear. Rid yourself of debt. Use the good times to lay up in store against the bad. Regardless of what most Americans are doing, individuals can make decisions to control their own economic futures.