Families Go Deep in Debt to Stay in the Middle Class
The American middle class is falling deeper into debt to maintain a middle-class lifestyle. Cars, college, houses and medical care have become steadily more costly, but incomes have been largely stagnant for two decades, despite a recent uptick. Filling the gap between earning and spending is an explosion of finance into nearly every corner of the consumer economy. Consumer debt, not counting mortgages, has climbed to $4 trillion—higher than it has ever been even after adjusting for inflation. Mortgage debt slid after the financial crisis a decade ago but is rebounding.
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The debt surge is partly by design, a byproduct of low borrowing costs the Federal Reserve engineered after the financial crisis to get the economy moving. It has reshaped both borrowers and lenders. Consumers increasingly need it, companies increasingly can’t sell their goods without it, and the economy, which counts on consumer spending for more than two-thirds of GDP, would struggle without a plentiful supply of credit. In one sense, the growing consumer debt is a vote of confidence in the future. People borrowing money today expect to have the income tomorrow to pay it back. Consumer debt tends to rise when borrowers feel secure in their jobs.
But the debt pile is also an accumulated ledger of economic risk. It should be manageable so long as unemployment remains low. If job losses begin to rise, it would become unsustainable for some share of borrowers, raising chances of an increase in missed payments and lenders writing off unpaid balances. The Fed lowered interest rates on Wednesday because it sees rising risks of a slowdown that could boost unemployment. Median household income in the U.S. was $61,372 at the end of 2017, according to the Census Bureau. When inflation is taken into account, that is just above the 1999 level.
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Nowhere is the struggle to maintain a middle-class lifestyle more apparent than in cars. The average new-car price in the U.S. was $37,285 in June, according to Kelley Blue Book. It didn’t deter buyers. The industry sold or leased at least 17 million cars each year from 2015 to 2018, its best four-year stretch ever. Partly because of demand satisfied by that run, sales are projected to be off modestly this year. How households earning $61,000 can acquire cars costing half their gross income is a story of the financialization of the economy. Some 85% of new cars in the first quarter of this year were financed, including leases, according to Experian. That is up from 76% in the first quarter of 2009.
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The partial federal-government shutdown that ended in January exposed the vulnerability of many consumers. Discover Financial Services said thousands of government workers told it they were unable to make the minimum payments on their credit cards and the monthly payments they owed on personal loans and private student loans. Discover waived fees, allowed customers to skip a payment and held off on reporting missed payments to credit-reporting firms. In case of a broad economic downturn, these people’s debt levels could weigh on the economy for an extended period, because people who carry a lot of debt into a downturn tend to rein in their spending for years afterward.
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https://www.wsj.com/articles/families-go-deep-in-debt-to-stay-in-the-middle-class-11564673734 (paid subscription)