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CNN
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The American economy is currently giving off strange vibes.
There are millions of job opportunities and the unemployment rate is low. In fact, it hasn’t been this low in decades. You might think this would mean the economy is coasting, since periods of low unemployment are generally associated with higher rates of economic prosperity.
But there are a host of red flags right now — like a large and growing share of people, particularly Gen Z, taking on such levels of credit card debt to cover their expenses that lenders have stopped lending them more money.
This seems to be the case with much recent economic data: no good news comes without other evidence that gives economists pause. “I wouldn’t give the economy a positive bill of health,” said Gregory Daco, chief economist at EY. “It seems robust, but there are pockets of concern. »
But while the state of the economy prompts economists to weigh their words, presidential candidates see it in more binary terms. For example, President Joe Biden is telling voters that the economy is booming and has mostly never gotten better — even though, as he often says, there is still work to do. Yet from former President Donald Trump’s perspective, “the economy is collapsing” and is in total disarray, he said at a recent campaign rally in Wisconsin.
Here’s what’s really happening.
If you’re already optimistic about the current state of the economy, you’ll feel even better by analyzing some of the latest job market data.
There are currently 8.5 million vacancies. This exceeds the number of job openings before the pandemic by 1.5 million. Meanwhile, there are 6.5 million unemployed. This means that there is more than one job per job seeker. In the decade before the pandemic, this ratio averaged 0.6, meaning there were more job seekers than vacancies.
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The average hourly wage for Americans is 22% higher than before the pandemic, according to data from the Bureau of Labor Statistics. Although wage increases are slowing, they are increasing at a faster rate than prices.
This is good news for consumers because it means their incomes are still increasing.
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Even though inflation has slowed significantly from its summer 2022 peak, continued progress toward the Federal Reserve’s 2% target appears to be a long process.
That trajectory surprised many Fed officials, including Gov. Christopher Waller, who thought the economy would now be in a good position to cut interest rates. “However, the first three months of 2024 have cast a damper on this outlook, as inflation and economic activity data have come in much warmer than expected,” Waller said in a speech Tuesday.
But he said April’s consumer price index data, which showed a slight slowdown in headline inflation levels, was a “welcome relief”.
“If I were still a professor and I had to give a grade to this report on inflation, it would be a C+, far from a failure but not excellent either,” he added.
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But at the same time, consumers believe inflation will rise in the coming year, according to two surveys that Fed officials are watching closely.
Because inflation expectations can effectively control the pace of price increases, businesses take these expectations into account when setting prices for goods and services. This can lead to higher prices.
However, early retail spending figures for April turned out to be much weaker than expected as consumers curbed their spending. This is a good thing in the sense that it does not give retailers the ability to pass on higher prices to consumers if they are not willing to accept them, which was the case previously. But given that consumer spending is one of the main drivers of the economy, a downturn can also have negative effects.
“It’s certainly worth watching, but some of the weakness was likely a ‘payback’ for the strength of previous months,” David Alcaly, chief macroeconomic strategist at Lazard, told CNN.
Daco said he views the retail sales report as a sign that consumers are “a little more cautious, but not layoffs.” However, if spending starts to slow much further, it could have a negative impact on the economy, he said.
The biggest red light flashing in the economy right now is the level of debt people are accumulating.
One reason consumer spending has held up so well in the face of higher-than-desirable inflation combined with the highest interest rates in more than two decades is that consumers aren’t necessarily spending within their means.
The savings accumulated by many during the pandemic have all but evaporated, leading to many more credit card purchases that aren’t being paid off on time.
This, combined with the gradual cooling of the labor market – which reduces worker debt – is causing some households to accumulate more debt and fall into serious delinquency, meaning more than 90 days late on a payment.
Recent data from the New York Fed showed that the percentage of credit card balances in serious default reached its highest level since 2012.
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“Increasing levels of consumer debt and delinquency rates, if they continue, are not just individual problems; they could have macroeconomic effects requiring attention from economic policymakers,” wrote Sung Won Sohn, professor of economics and finance at Loyola Marymount University and chief economist of SS Economics, in a recent note. “As more income goes toward paying down debt, consumers have less disposable income for other purchases.”
Rising delinquencies will likely force banks and other lenders to lend less money to borrowers deemed riskier or prompt lenders to charge even higher interest rates, he said. Ultimately, these combined effects “may contribute to a broader economic slowdown or even a recession.”