Financial Update 8-21

Financial analysts have been talking about economic recovery for over a year now, and it’s been generally agreed that the world was indeed pulling itself out of the mire of the 2008 crash. There have been a few stumbling blocks along the way though, from the USA’s negative growth figures in the first quarter of this year to the recent setback in equities prices. News from Europe also points to the recovery not being as solid as it could be, with the Eurozone’s two largest economies, Germany and France, both reporting that their economies contracted last quarter. Now a new report from the Federal Reserve highlights the continuing effects of the economic crisis on ordinary Americans.

Home ownership is one of the great American aspirations, but in the current climate it’s one that many people feel is either out of reach or too much of a risk right now. The home ownership rate dropped by 0.3 percent in the second quarter of 2014, to 64.7 percent. That’s the lowest figure in 19 years. It’s good news for the rental sector, which has the lowest vacancy rate since the mid-90s, but paying rent doesn’t add to household net worth the same way paying off a mortgage does. In any case rents are rising by well above inflation – 6.1 percent up on last July. Wages aren’t coming close to keeping up, and as the percentage of income spent on housing increases the amount available for other things drops. That depresses demand in the rest of the economy.

One reason fewer people are buying homes is that they just can’t afford it. Median personal wealth fell 36 percent between 2003 and 2013, from $87,992 to $56.335. At the same time savings are falling. A year ago 50 percent of Americans had at least three months’ expenses in the bank. That’s now down to 45 percent. With no reserve to cope with unexpected job losses or unexpected bills, people are reluctant to take the risk of buying a home. The massive losses inflicted on real estate in 2008-2009 just add to the pressure.

Even the favorite American status symbol, the automobile, is under pressure. While sales remain strong the average term of auto loans has increased to 66 months this year, the longest since credit companies started tracking that data in 2006. A quarter of new loans are for between 73 and 84 months. This is a clear sign that household budgets are still under pressure, and while people are still committed to auto purchases they’re having to stretch loan terms – and accept higher total payments – to manage it.

The fact that personal finances remain so precarious six years after the crash has to be a concern for the recovery in general. At the end of the day the only reliable driver of economic growth is demand, and that can’t grow unless people have disposable income available. Unless the pressure on households starts to ease off it’s all too possible that the economy will run out of steam again in the near future as worried consumers cut their discretionary spending.