Economy

3 Things That Will Happen to Your Wallet in the Next Year

Is the so-called recovery coming your way?

Photo Credit: Shutterstock.com

Lately, we’re hearing a lot of upbeat news about the economy. U.S. hiring recently hit the highest level in almost seven years. And America’s economic output, or GDP, rose over 4 percent in the last quarter. But this cheery news is really just the economy wearing a mask. What’s underneath that mask is an underlying weakness— a weakness poll after poll has shown that many Americans sense today: Five years after a statistical recovery began in 2009, ordinary people are still hurting.

Headlines like these tell a story that isn’t about recovery: “U.S. Consumer Spending Flat in August” (Gallup); “America’s Fed Up: Obama Approval Rating Hits All-Time Low, Poll Shows” (NBC News); “ Student Debt Linked to Worse Health and Less Wealth (Gallup)”; and “Americans Losing Confidence in All Branches of U.S. Gov’t (Gallup).”

So, while consumer sentiment might be rising, people are deeply skeptical of this so-called recovery even as the Federal Reserve is talking about raising interest rates and "normalizing policy" — moves which are supposed to signal that things are going well. 

When the Fed raises interest rates — the rate at which banks borrow money — it has a ripple effect across the entire economy. Loans to households and businesses become more expensive on everything from small business loans to mortgages to cars.

Let me be honest here; we are nowhere near the point where the economy can support rate hikes. The Congressional Budget Office is forecasting a measly 1.5 percent growth for the U.S. economy in 2014. Yes, the U.S. is in a full-blown cyclical recovery now. But the recovery is one that has been muted because of lingering effects from the financial crisis and zero wage growth for middle-class Americans. Did you know, for instance, that this recovery has been the weakest in terms of wage growth of all post-war U.S. recoveries?

You don’t get a robust economy with low wage growth, because ordinary people don’t have enough money in their pockets to buy goods and services, which causes businesses to freeze hiring, or even worse, go under.

It probably hasn’t escaped your attention either that all of the gains have been going to the top 20 percent. According to Bureau of Labor Statistics, the households in the top 20 percent saw income grow $8,358 per year from 2008 to 2012, while the households in the bottom 20 percent actually saw income decline $275 per year. So, technical recovery or not, it’s hard to be optimistic when we see these kinds of figures.

So what can you expect on the horizon? If you’re a regular Joe or Jane, working for a living, here are three things you can expect in the next year.

1. You might have an easier time finding a job.

The labor market is tightening and we should expect that trend to continue. Unemployment is now at 6.2 percent, down from a 26-year high in late 2009. Job openings recently hit a 13-year high of 4.7 million. The number of workers hired inched up to 4.8 million, while 2.53 million felt comfortable enough with their employment options to quit in June, the highest level in 6 years. And jobless claims are averaging a tad under 300,000, about the lowest level since the halcyon days of the housing bubble. This is all good and will eventually lead to wage growth. But to date, according to a recent Bloomberg News report, only households in the top 20 percent have seen gains. Plus, we don’t know how much growth there will actually be. Nor do we really know what industries will benefit.

2. Things are going to get a little more expensive.

Even if you do see a little more money in your paycheck, what if that money doesn’t go quite as far as it used to? That could happen if the Fed makes certain moves.

It looks like the Fed will continue to tighten policy unless we get an abrupt downshift in the economy. Now, remember, economic policy in the U.S. has been geared toward the wealthy. We have been tightening fiscal policy, which means cutting government spending on social programs, infrastructure, education, and the things that regular people need in order to prosper.

We’ve also been loosening monetary policy to drive recovery, which increases the appetite for risk and speculation on the part of the wealthy. That’s where the dichotomy between the top 20 pecent of households and the bottom 20 percent comes from. But if you listen to Fed officials, it’s clear this policy tilt is coming to an end. Instead, we will have tighter fiscal policy and tighter monetary policy, too. This is going to put pressure on asset prices and could temper wage gains that would otherwise come. Businesses that feel the pressure of Fed rate hikes will be less likely to take on new staff and less likely to increase wages.

3. It will be harder for you to get a loan for a car.

Very likely, banks will tighten lending standards as rate hikes and signs of poor lending hit the bottom line. As an example, in the past couple of years, more people wanted to buy cars because banks were loosening credit standards. The banks wanted to create loans that they could package up into auto asset backed securities as they did during the housing bubble with mortgage loans and mortgage backed-securities.

Just as we saw with housing last cycle, lenders are sub-priming the market, preying on lower credit buyers and putting them into higher rate loans worth more than the price of the vehicle. The New York Times did a must-read exposé on this market. What they found was fraud — like what we saw in mortgages during the housing bubble. So, this is a disaster waiting to happen. And I believe it will happen when the Fed hikes rates because signs that auto demand is slowing and that delinquencies are rising have just started to accumulate.

So what does this mean all together? It means that the American economy has a cyclical recovery that’s not going to do a whole lot of good for you and me. It’s really based on low-interest rates instead of wage gains that will likely weaken due to tighter monetary policy and higher interest rates.

In the end, when monetary policy tightens and interest rates go up, fewer people will have the ability to buy houses, cars and more consumer goods. And consequently, I fear that the opportunity for wage gains to kick in will diminish just as the "real" recovery is beginning.

With most of the gains of this so-called recovery going to the wealthy, one thing is clear: policy needs to change. Income inequality is on the rise and many households are just treading water. Recovery or not, these trends are not good for our economy in the long run.

Ed Harrison is the founder of the Credit Writedowns blog.

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