{"id":6211,"date":"2016-06-02T19:27:18","date_gmt":"2016-06-02T19:27:18","guid":{"rendered":"http:\/\/www.rationalargumentator.com\/index\/?p=6211"},"modified":"2016-06-03T04:45:58","modified_gmt":"2016-06-03T04:45:58","slug":"deeper-debt-real-incomes-fall","status":"publish","type":"post","link":"https:\/\/www.rationalargumentator.com\/index\/blog\/2016\/06\/deeper-debt-real-incomes-fall\/","title":{"rendered":"We\u2019re Going Deeper into Debt as Real Incomes Fall – Article by Victor Xing"},"content":{"rendered":"
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\"The<\/a>Victor Xing<\/span>
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New York Fed President Dudley recently commented<\/a> that \u201creal consumer spending growth appears to have moderated somewhat from the relatively robust pace of the second half of 2015.\u201d While this may suggest headwinds from cyclical economic conditions, there are emerging signs that ultra-accommodative policy also acts as a constraint on consumer spending via income effects<\/em>. Instead of inducing savers to spend and borrow, rapid asset price appreciation as a result of monetary easing has outpaced wage growth, and pass-through services inflation subsequently reduced discretionary income and forced already-levered consumers to save instead of spend. This unintended consequence worked against accommodative policy\u2019s desired substitution effects<\/em> and suggests further easing would likely yield diminishing results if asset price appreciation continues to outpace real income growth.<\/p>\n

Asset Price and Services Inflation Outpaced Real Wage Growth<\/b>
\nPost-2008 policy accommodation broadly lowered funding costs for consumers and businesses to supported asset price appreciation. However, rising prices have also made assets less affordable, and home buyers \u201cpriced out\u201d of their respective housing markets subsequently became involuntary renters<\/a>. Not only do they not benefit from rising home values, higher education, and medical care inflation also outpaced aggregate real wage growth (Chart 1) to weigh on renters\u2019 discretionary spending.<\/p>\n

\"xing1\"<\/a>In response with rising commercial real estate prices (Chart 2), businesses also pass on higher operating costs in the form of services inflation. Year-over-year personal consumption expenditure \u2014 services (chain-type price index) has been well-anchored in the 2% range (2.13% in Feb 2016) since 4Q 2011.<\/p>\n

\"xing2\"<\/a>Another factor constraining consumer spending is the well-publicized effect of student debt burden<\/a>. This supports a view that household spending may be at a lower potential than during prior cycles, thus magnifying the costs of higher services inflation as a result of asset price appreciation.<\/p>\n

Consumers Redlining their Engines: Inability To Pay $400 Emergency Expense<\/b>
\nAccommodative monetary policy encourages consumers to spend and borrow rather than hoarding cash<\/a>. However, cash-strapped consumers already facing the pressure of debt burden would likely do neither.<\/p>\n

Federal Reserve\u2019s recent Report on the Economic Well-Being of U.S. Households<\/a> highlighted signs that some consumers are already stretching their spending power to meet existing obligations. 47% of respondents reported that a $400 emergency expense would be \u201cmore challenging to handle\u201d (unable to use cash or a credit card that they pay off at the end of the mouth). Results from middle-income household with $40,000 to $100,000 annual income were similarly downbeat, where 44% of respondents indicated difficulties (Chart 3).<\/p>\n

Chart 3: Percent of respondents who would completely pay an emergency expense that costs $400 using cash or a credit card that they pay off at the end of the month (by race\/ethnicity and household income)<\/strong><\/p>\n

\"xing3\"<\/a>Source: Federal Reserve Board of Governors<\/p>\n

Chart 4: During the past 12 months, was there a time when you needed any of the following, but didn\u2019t get it because you couldn\u2019t afford it?<\/strong><\/p>\n

\"xing4\"<\/a>Source: Federal Reserve Board of Governors<\/p>\n

A survey on health-care expenses was also discouraging. 31% of respondents reported going without some type of medical care in the preceding 12 months due to inability to afford the cost. 45% of those surveyed under a household income of $40,000 reported similar decisions to defer treatment.<\/p>\n

In the section \u201cspending relative to income,\u201d Fed researchers reported that one-in-five respondents with spending exceeded their income (leveraged spending). These are signs that consumers were taking advantage of lower rates, but the spending does not appear to be sustainable without corresponding rise in real wage growth.<\/p>\n

Rising Renter Cost Burden<\/b>
\nAnother factor constraining discretionary spending is rising renter cost burden. The Harvard Joint Center for Housing Studies projected<\/a> a \u201cfairly bleak picture of severe renter burden across the U.S. for the coming decade.\u201d The report acknowledged falling incomes among renters and the persisting gap between renter income and renter housing costs (Chart 6), as well as severely burdened renter households (housing costs of more than 50% of household income) reaching 11.8 million in 2015 (Chart 7), or about one in four renters.<\/p>\n

Assuming the correlation between rental price inflation and asset price inflation holds, further declines in housing affordability as a result of policy easing would exacerbate renter burden \u2014 one likely needs rising real wages to offset.<\/p>\n

Chart 5: In the past 12 months, would you say that your household\u2019s total spending was more, less, or the same as your income? (by household income)<\/strong><\/p>\n

\"xing5\"<\/a>Source: Federal Reserve Board of Governors<\/p>\n

\"xing6\"<\/a>\"xing7\"<\/a><\/p>\n

Impacts of \u201cLong and Variable Lags\u201d Between Asset Price Inflation and Real Wage Growth<\/b>
\nFinancial market participants play an essential role in the transmission of Federal Reserve\u2019s monetary policy by affecting financial conditions \u2014 the following components are part of the GS Financial Conditions Index<\/a>:<\/p>\n