SERIOUS MONEYTHE US ECONOMY is on the mend and a self-sustaining expansion appears set to take hold. At least, that's the verdict of most Wall Street economists, following the latest slew of economic data, which showed that non-farm payrolls increased by 243,000 last month – the largest number of net additions since last spring – and, that the unemployment rate dropped to 8.3 per cent – the lowest reading since February 2009.
The new found cheer in the labour market has been accompanied by the return of US households’ vociferous appetite for new borrowing.
Indeed, consumer credit advanced at an annual rate of over 9 per cent in December – on top of the eye-popping near 10 per cent jump the previous month – to bring the annual rate of growth in the fourth quarter to 7.5 per cent, the most rapid rate of increase in more than a decade.
The headline numbers would appear to suggest that the previously beleaguered consumer, the primary engine of economic growth, is back in the driving seat and set to propel the economy forward.
However, first appearances can be deceptive and a more considered analysis of the data reveals that the grounds for optimism may not be as robust as the bullish commentators seem to believe.
The notion that the labour market is in recovery is not in dispute but the headline numbers almost certainly flatter to deceive. The unemployment rate has dropped almost two percentage points from its cycle peak of more than 10 per cent during the autumn of 2009 but, the improvement is exaggerated by trends in the labour force, where numbers have declined by 2.4 million since the end of the recession more than 30 months ago, and stagnated since the summer of 2007.
Numbers in the labour force have failed to keep pace with the natural growth in the working-age population, which amounts to roughly 125,000 every month, and as a result, the participation rate has dropped to the lowest level since the summer of 1983.
The underlying increase in the working-age population since the economic recovery began two-and-a-half years ago suggests that the labour force should be near 160 million – more than six million above the documented number – in which case the unemployment rate would be close to 11.5 per cent, and that sobering statistic is before consideration of the countless Americans that are currently reported as underemployed.
Back-of-the-envelope calculations reveal that the labour market remains oversupplied, but the harsh reality is disguised by the fact that potential workers have been leaving the labour force in their droves due to the general absence of employment opportunities. Individuals of working age are not included in the labour force if they retire, return to full-time education and are unavailable for work, simply give up looking for gainful employment, or are institutionalised.
Working age individuals who have simply given up looking for work capture the largest share of those who have left the labour force by far, but those who have returned to school are a significant component and help to shed some light on the recent trends in consumer credit.
Note that non-revolving credit outstanding jumped $22 billion over the past two months and federal government loans, which include student loans, accounted for almost 70 per cent of the increase. Further, outstanding federal government loans have surged 2.4 times over the past two years to more than $425 billion, as the demand for student loans leapt exponentially. Federal and private student loan debt combined is rapidly approaching $1 trillion and exceeded credit card debt for the first time in 2010. The trend is disturbing because the debt burden for individual borrowers is far higher given that there are considerably fewer people with student loans than there are credit card holders.
Student loan debt has increased for every age group over the past three years according to CreditKarma, the credit score tracking site, but the pace of growth among those aged between 35 and 49 has been staggering at almost 15 per cent a year.
Further, loans to parents for the college education of their children have soared by 75 per cent over the past five years and the estimated payback figure has jumped to an estimated $50,000 for parents over a standard 10-year period.
Needless to say, signs of stress are beginning to emerge. Indeed, a survey by the National Association of Consumer Bankruptcy Attorneys (NACA) reveals that more than 80 per cent of bankruptcy attorneys say that the number of their potential clients with student loan debt has increased “significantly” or “somewhat” over the past three to four years.
The trend is disturbing as almost all of the attorneys surveyed believe that extremely few borrowers will be discharged from their loan obligations as a result of undue hardship. Indeed, NACA reports that, “for those with federal student loans, the government has collection powers far beyond those of most creditors. The government can garnish a borrower’s wages without a judgment, seize a tax refund ... and deny eligibility for new education grants or loans.”
NACA notes that, “there is no discharge in bankruptcy for federal loans except in extremely limited circumstances” and that, “unlike any other type of debt, there is no statute of limitations. The government can pursue borrowers to the grave.”
Recent economic data has seen the enthusiastic bulls hail the arrival of a self-sustaining recovery.
Not for the first time, the analysis is decidedly myopic and a closer examination of the facts reveals that the conclusions are premature.
