Has the U.S. Economy Really Recovered?
Federal Reserve Chair Janet Yellen announced that interest rates would stay put—for now. The reason this time around? The U.S. economy has slowed and consumer spending was muted. This is in addition to the fact that the global economy remains weak and the U.S. is part of the connected, globalized world. There is another reason, though, why Yellen should be cautious about raising rates: a whopping 47% of Americans would have to borrow or sell something to cover a $400.00 emergency or face insolvency.
Half of Americans Can’t Scrape Together $400
The Federal Reserve didn’t really surprise anyone, or at least I hope no one was taken off guard, when it announced it was holding its key lending rate in the range of 0.25% to 0.50%. (Source: “Federal Reserve Statement,” Board of Governors of the Federal Reserve System web site, April 27, 2016.)
Back in December, the Federal Reserve announced its first rate increase in almost a decade, saying future rate hikes in 2016 would be gradual. Most presumed this would mean four moderate rate hikes. But that is in jeopardy, as the U.S. economy remains fragile. Fears that weak global growth and a frenetic stock market also could further damage the U.S. economy, meaning we are not out of the woods just yet—far from it.
By keeping interest rates pat, the Federal Reserve not only helps prop up the S&P 500, but it also allows most Americans to tread water financially. The S&P 500 recently marked the second-longest bull market on record. The average American is not faring quite as well. In fact, almost half (47%) of Americans are $400.00 away from being financially insolvent. (Source: “The Secret Shame of Middle-Class Americans,” The Atlantic, May 2016.)
That means that if half of all Americans are faced with an unexpected medical bill or anything else out of the ordinary, they would face the prospect of bankruptcy. What’s worse is that when you’re that close to an economic precipice, rising interest rates will push them closer to bankruptcy. Things are getting so tight, the average American will need to incur debt just to pay their regular household expenses.
None of this adds up to sustainable economic growth in the U.S., especially with the White House relying on the American consumer to spend the U.S. economy’s way to prosperity.
Weak Data Points to Muted Growth
Middle-class Americans, once the pillar of our economy, are now a fractured minority. Thanks to rising stock market valuations and the growth of upper-income households coupled with growth in lower-income households, the middle class is shrinking. Today, the American middle class accounts for less than 50% of the population. In 1971, it stood at 61%.
April’s jobs report bears witness to the continuing decline of the middle class and financial security. In April, the U.S. added just 160,000 jobs, its weakest pace in seven months. (Source: “The Employment Situation,” Bureau of Labor Statistics web site, April 6, 2016.)
That’s the good news. The bad news at the other end of the spectrum is that 61,582 people lost their jobs in April. That represents a 35% increase from March and a five percent increase from April 2015. For the first four months of the year, cuts have totaled more than 250,000—a level not seen since early 2009.
In April, the labor force participation rate decreased to 62.8% and hiring in a number of key industries, including construction and manufacturing, stalled. So, too, did hiring in once-reliable (albeit low-paying) areas of employment like retail trade, leisure, and hospitality. Overall, the unemployment rate remains unchanged at five percent while the underemployment rate remains stuck near 10%.
Weak jobs growth does not bode well for a government that maintains the U.S. is in the midst of a jobs market recovery and the economy is doing well. Nor does it look like the Federal Reserve will be able to raise interest rates in June—maybe even for the rest of 2016.