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The Weekly Bottom Line Tax Bills: When Two Is Not Better Than One

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By almost every measure, the U.S. economy is booming. But a look behind the headlines of roaring job growth and consumer spending reveals how the boom continues in large part by the poorer half of Americans fleecing their savings and piling up debt.

A Reuters analysis of U.S. household data shows that the bottom 60 percent of income-earners have accounted for most of the rise in spending over the past two years even as the their finances worsened - a break with a decades-old trend where the top 40 percent had primarily fueled consumption growth.

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With borrowing costs on the rise, inflation picking up and the effects of President Donald Trump’s tax cuts set to wear off, a negative shock - a further rise in gasoline prices or a jump in the cost of goods due to tariffs - could push those most vulnerable over the edge, some economists warn.

That in turn could threaten the second-longest U.S. expansion given consumption makes up 70 percent of the U.S. economy’s output.

To be sure, the housing market is far from the dangerous leverage reached in 2007 before the crash. With unemployment near its lowest since 2000 and job openings at record highs, people may also choose to work even more hours or take extra jobs rather than cut back on spending if the money gets tight.

In fact, a growing majority of Americans says they are comfortable financially, according to the Federal Reserve’s report on the economic well-being of U.S. households published in May and based on a 2017 survey.

Yet by filtering data on household finances and wages by income brackets, the Reuters analysis reveals growing financial stress among lower-income households even as their contribution to consumption and the broad economy grows.

The data shows the rise in median expenditures has outpaced before-tax income for the lower 40 percent of earners in the five years to mid-2017 while the upper half has increased its financial cushion, deepening income disparities.

It is this recovery’s paradox.

A hot job market and other signs of economic health encourage rich and poor alike to spend more, but tepid wage growth for many middle-class and lower-income Americans means they need to dip into their savings and borrow more to do that.

As a result, over the past year signs of financial fragility have been multiplying, with credit card and auto loan delinquencies on the rise and savings plumbing their lowest since 2005.

Myna Whitney, 27, a certified medical assistant at Drexel University’s gastroenterology unit in Philadelphia, experienced that firsthand.

Three years ago, confident that a steady full-time job offered enough financial security, she took out loans to buy a Honda Odyssey and a $119,000 house, where she lives with her mother and aunt.

Since then she has learned that making $16.47 an hour - more than about 40 percent of U.S. workers - was not enough.

“I was dipping into my savings account every month to just make all of the payments.” Whitney says. With her savings now down to $900 from $10,000 she budgets down to toilet paper and electricity. Cable TV and the occasional $5 Groupon movie outings are her indulgences, she says, but laughs off a question whether she dines out.

“God forbid I get a ticket, or something breaks on the car. Then it’s just more to recover from.”


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Source : https://www.cnbc.com/2018/07/23/the-bottom-half-is-bolstering-the-us-economy-thanks-to-borrowing.html

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