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MacroMonitor Market Trends Newsletter September 2020

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Debt: Underwater

At the beginning of August 2020, more than 31 million people were unemployed; some sources peg the number closer to 36 million. As a recent Bureau of Economic Analysis (BEA) release shows, the Gross Domestic Product (GDP) advanced estimate for Q2—an historic annual-rate decrease of 32.9%—reflects the precipitous drop in consumer spending, primarily the result of unemployment. In August 2020, Forbes reports that 52% of government-stimulus check recipients paid off debt, according to a survey conducted by Nielsen Homescan; 30% paid outstanding bills; 14% saved the money in an emergency fund—none of these actions helped the GDP. Wolf Street reports that, on the basis of data from the New York Fed, credit-card debt fell by $82 billion in Q2, however, "all other household credit categories combined—mortgages, HELOCs, auto loans, student loans, and other credit—rose nearly as much as credit card balances fell."

Inconsistent efforts to contain the virus cause additional job losses which, in turn, prolongs the economic downturn. As early as April, both Bloomberg and the Associated Press (AP) reported that "layoffs and pay cuts are starting to impact white-collar professionals." In order to stay afloat, many companies have to freeze salaries, cut hours, scale back benefits, implement furloughs, and eliminate positions. Any reduction in white-collar household income (HHI) impacts the economy disproportionately because these households (HHs) are not only dependable-consumer HHs, they are heavily leveraged.

Trend: Household Debt

A MacroMonitor trend of household debt for all HHs in contrast with the 20% of all HHs with a working primary head that have an annual HHI of $100K to $250K (Working HHI $100K–$250K) is instructive. A comparison of 2000 data and 2018 data show a difference of $9,240 more debt for all US HHs and $2,500 less in debt for Working HHI $100K–$250K. In 2000, 21.3 million HHs owed an average of $182.5K, in comparison with 2018 when 28.8 million HHs owed an average of $180K.

At first glance, the trend of household debt paints a fairly rosy picture of a successful post-financial crisis recovery. However, due to household growth, the chart shows only the tip of an iceberg of debt. The real story is the aggregate amount of debt owed by Working HHI $100K–$250K; $3.9 trillion in 2000 (adjusted for inflation); $5.2 trillion in 2018.

Some business and professional-practice owners (14% of Working HHs $100K–$250K) are likely taking on water already. For others, in a down economy, replacement jobs that once paid $100K annually are likely to pay $75K at best. Even a reduction of one-quarter pay may threaten a household's financial health. Average monthly disposable income ($1,875 in 2018) disappears rapidly. One of the few lifeboats available to these households may be retirement savings.

Unlike during the Great Depression of the 1930s, thanks to British economist John Maynard Keynes we know that enough government stimulus will bring about a recovery, the result of The Multiplier Effect. To date, the US government has not spent enough money in the right places to cause a hoped-for V-shaped economic recovery. Jobs are being lost faster than they are being created. The United States is, "In the middle of the greatest health and economic crisis in generations, millions of Americans have found themselves impoverished and disconnected from medical care." (The Atlantic, September 2020.)

Ramifications of the country's most active consumers carrying a high debt load will be varied and long lasting (broad and deep). Examples include: a drop in the price of expensive real estate in large markets and a contraction of the commercial real-estate market; a shrinking of the luxury-goods retail market; fewer consumer choices as manufacturers pull back on brand extensions with only niche appeal; and the demise of the 1980s dual-income nuclear family to a model in which it takes three working adults to support a household.

Taking the pulse of Working HHI $100K–$250K regularly will aid in anticipating changes, identify potential business opportunities, and assist these households' recovery.

Learn more about vulnerable working households with $100K to $250K in income and high debt. Subscribers can segment MacroMonitor respondents by working status and household income who completed the questionnaire.