It is normal for our economy to get a bump when new and promising things happen. Economic measures go up at the first of the year, when a new president is inaugurated and following tax reform legislation. People are generally more optimistic at those times and spend more freely boosting the economy.
Those events contribute to the marginally better economy we are experiencing, but there are some troubling blips on the radar. The smooth sailing may be over and we might be facing turbulent times.
First, the effects of the Trump tax cuts are diminishing. IRS policy changes for the 2019 and 2020 tax years will result in increasing taxes. Standard deductions will be going up in response to anticipated inflation, meaning that a larger share of income will be subject to taxation. This will have the effect of taking money out of the economy in 2019 without returning any real value. That might slow inflation, but at the expense of a decrease in the standard of living for most people.
Here is a chart comparing the rise of tax receipts with the rise in average hourly wages over the last couple of years:
Source: U.S. Bureau of Economic Analysis, Federal government current tax receipts: Personal current taxes [A074RC1Q027SBEA], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/A074RC1Q027SBEA, November 17, 2018.
The important thing to compare are the angles of the two lines. Generally the blue line, tax receipts, is stepper than the orange line representing hourly income. That means that taxes are increasing at a greater rate than income, lowering real income. Even though we might make more money the increases are eaten up by taxes that are increasing even faster than wages. The sharp dogleg in tax receipts is the temporary bump in paychecks we saw right after the Trump tax bill was passed.
Another troubling development is the increase in household debt and delinquencies on payments. Household debt reached a new record of $13.5 trillion dollars last quarter. Household debt is the aggregate of all personal debt arising from personal loans, credit cards, auto loans, home mortgages and student loans. Debt can be a good thing when it is being reliably paid down, but payments have become less reliable.
Student loans, credit card and auto debt delinquencies have been rising, especially student loan delinquencies which have increased from 8.6% to 9.1% in the last quarter. This implies that increases in wages are not keeping up with the ability to service debt.
The troubling thing about student load debt is that it does not result in a net wealth increase for people holding it. Education is not a good investment when jobs are scarce, yet that is when people tend to go to school. The chart below starkly illustrates the lack of a relationship between education and income. Education is a good investment only during good economic times. Going into education debt during a downturn only ensures more poverty.
Source: U.S. Bureau of the Census, Real Median Household Income in the United States [MEHOINUSA672N], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/MEHOINUSA672N, November 17, 2018.
Other signs of a weakening economy are jittery tech stocks. The FAAMG stocks — Facebook, Amazon, Apple, Microsoft and Alphabet – have an outsize effect on the stock market. When the techs experience a downturn, so does the rest of the stock market.
Although the FAAMG stocks are generally healthy, trends are gathering that might have an impact on their volatility. Facebook is losing members and its stock value has been declining since the summer when foreign manipulation of public opinion came to light during the 2016 election. IPhone sales are down, and holiday buying expectations are guarded.
None of this means a recession is imminent. What is concerning, though is that our new economy is not nearly as resilient as the one that disappeared in 2008, and even a modest downturn could have catastrophic effects on so many members of our economy living and dying with poverty.