With the cost of housing, gas, even going out for dinner, having all gone up over the past few years, you’d think family income would have risen. But it hasn’t.
According to recent report from the Federal Reserve, average U.S. family income fell 2.3% to an inflation adjusted $70,700 in 2004 from $72,400 in 2001. But, how could housing prices have gone up so much from 2001 to 2004 if average incomes didn’t?
It all has to do with interest rates. The lower interest rates fell from 2001 to 2004 (remember rates fell to a 46-low in 2004), the more consumers could borrow. And this corresponds with the increase in average household debt during the same period.
Consumers make about the same today as they did five years ago, but they have much greater debt. As interest fell, instead of saving, consumers just went out and increased their debt levels. Buying a house was no longer a decision based on price, but a decision based on “how big of a house can I afford with my monthly payment.”
The U.S. created 243,000 new jobs in February–more than analysts expected. When coupled with the jump in factory orders I talked about the other day, the Fed will continue to raise interest rates. And that’s bad for consumers who borrowed too much under the “how big of a house can I afford with my monthly payment” theory.
In my opinion, the Fed is more concerned with cooling the economy and keeping inflation under control than it is with consumer debt levels and how consumers deal with their ballooning monthly payments. The Fed didn’t tell consumers to go out and borrow so much, although by bringing interest rates so low, the Fed did entice consumers to spend.
How will the average American consumer cope with high debt levels under an environment of high interest rates? Obviously, not good. Consumers are now signing the tune “they made me borrow so much.” But, by the same token, I don’t believe the Fed will do anything about it until consumers cut back on spending to the point the economy really feels it. And were simply not their yet. No. It might take a few more interest rate hikes to get us there.