We’re not predicting a recession. Only fools speak with certainty about future economic conditions.
We can, however, say with certainty that many in America are not ready for a recession whenever it decides to come. It’s also unfair to blame these people completely, as the current 4.2% annual inflation rate, combined with lagging pay increases, has stretched budgets thin, especially among modest- to low-income people.
First-quarter government data shows U.S. household debt has reached an all-time high of $18.8 trillion. Of that, $13.19 trillion was borrowed for mortgages, and $1.69 trillion was for car loans. But unsecured credit card debt was a combined $1.25 trillion, which ought to be a concern. MSN reports the average credit card balance has risen 2.3% year-over-year to a current $6,519.
It’s common to hear folks complaining about the size of the national debt, which is rapidly approaching $40 trillion. People complain, rightly, about Washington’s lack of fiscal discipline. However, personal discipline is perhaps just as important, if not more so.
Financial stress is increasing
In a recent blog post, Masataka Mori, a research associate at the Federal Reserve Bank of St. Louis, wrote about how financial distress — often defined as the inability to make payments on debt — can affect the broader economy.
“When households’ finances are tight, they tend to cut back on spending,” Mori wrote. “Families may delay major purchases, reduce discretionary spending or avoid taking on new financial commitments.
“When many households do this at the same time, overall consumer spending declines, which can slow economic growth and lead to job losses. This dynamic played a major role during the Great Recession, when financially stressed households sharply reduced spending.”
These problems tend to be hardest on low-income households. Inflation, lack of wage increases and changes in interest rates can add up to an inability to pay debts. That is particularly true as interest rates rise on credit card balances.
Recession coming?
For several years now, experts have seemingly always expected a recession within six months, and they have consistently been wrong. The American economy has stayed remarkably robust. Even with the record household debt, economists believe the debt-to-income ratio is stable compared with the run-up to previous recessions, according to Yahoo Finance.
That doesn’t mean Americans should be complacent.
If there is trouble ahead, some economists say it will be driven by artificial intelligence’s failure, so far, to provide the predicted return on investment. In a recent New York Times opinion piece, former Biden White House economist Jennifer M. Harris said so much money is being invested into data center construction today that it “is beginning to starve the rest of the economy of the money it needs (to say nothing of the talent and physical materials).”
Data centers
One immediate victim is affordable housing, as developers opt for building data centers rather than starter homes. Another victim could be manufacturing, costing jobs, at least in the short term. And the demand for semiconductor chips at these centers could inflate the cost of other non-data center items that rely on them, from “laptops to phones.”
The lesson, learned from the 19th century railroad boom to the dot-com crisis of the early 21st century, she said, is that these opportunity costs, “if not correctly managed, can lead to recession.”
The housing affordability crisis is no trifling matter. It is a main reason why a recent Gallup poll found that, in spite of a relatively low unemployment rate and record highs on Wall Street, 57% of Americans think the economy is getting worse, an 11% increase over February.
Stubborn inflation helped doom the last presidential administration, and it’s a likely factor in President Donald Trump’s falling approval rating.
As we said, these factors may or may not portend financial troubles ahead. They should, however, persuade heavily indebted Americans to free their personal finances any way possible. That would brighten their personal outlook, and it could make any tough times ahead easier to navigate.