By Retire Better: 4 things to worry about while everyone else is celebrating the labor market
Economists ran out of superlatives to describe Friday’s blowout jobs report, which showed 517,000 added to the economy in January.
“This report ends U.S. recession fears,” tweeted Robin Brooks, chief economist at the Institute of International Finance.
“The January employment report emphatically underscored that the labor market remains hot and the U.S. economy’s demise has been greatly exaggerated” chimed in Stephen Stanley, chief economist at Amherst Pierpont Securities.
And the TV pundits were nearly at a loss for words.
“Wow! Wow!” Gushed CNBC’s Rick Santelli. “A blastoff of a number!”
“Wow!” echoed Fox’s Maria Bartiromo, no fan of Joe Biden. “A blockbuster,” she admitted.
It’s not like January was some sort of one-off. Job growth over the last two years has shattered records, and the jobless rate, at 3.4%, is the lowest most Americans have ever seen in their lifetime. And yet this Great American Jobs Machine isn’t done yet—there are still 11 million openings nationwide, the Labor Dept. says.
And yet beneath these spectacular headlines, troubles lurk. Here are four things to keep an eye on.
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401 (k) withdrawals
A study by Vanguard Group, the Pennsylvania-based investment giant, says a record number of people are raiding their 401(k) accounts to make ends meet. Granted, it’s only 2.8% of clients, Vanguard said, but that’s the highest it has ever seen. It “could be a sign of some deterioration in the financial health of the U.S. consumer,” said Fiona Greig, Vanguard’s global head of investor research and policy.
You might think that this is a result of the new Secure 2.0 law that was signed by President Biden, because it waives the 10% early-withdrawal tax penalty for savers who take out money from a 401(k) or individual retirement account for financial hardship. But Vanguard’s study came out before the law was even passed.
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Disposal income has plunged
Americans are now saving about 3% of their income, data from the St. Louis Federal Reserve shows—the lowest level since just before the near collapse of the U.S. economy back in 2008. It’s a far cry from 2019—the eve of the pandemic—when households saved 8.8% of their disposable income. That saving rate jumped to 16.8% in 2020, the highest annual saving rate on record, thanks to emergency spending by the government designed to keep people afloat. But inflation, which is now thankfully coming down, has meant a rapid cash burn of that federal aid.
Credit card balances are soaring
Major banks like Capital One
COF,
-2.50%,
Discover
DFS,
-0.87%
and American Express
AXP,
-1.27%
all reported a sharp rise in total debt. “Delinquency rates have surpassed pre pandemic levels in some corners of the consumer-lending business,” The Wall Street Journal reports.
Auto repossessions are surging
Watch out: the repo man is on the prowl. This classic canary-in-the-coal-mine indicator shows that folks who bought cars during her pandemic—at pandemic-inflated prices—now can’t afford the payments. “Subprime borrowers are more vulnerable to wage erosion and affordability concerns in the face of the softening global economy, rising inflation and monetary policy tightening,” ratings agency Fitch reported.
All of these things have two common threads: Inflation and higher interest rates. Between 2008 and last Spring, the federal-funds rate never went above 2.5%, and for most of that time was far below that, sometimes as rock-bottom as 0.25%. You don’t have to be a Harvard M.B.A. to know that the cost of capital doesn’t get much cheaper than that.
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But that era, which fueled everything from stocks to housing prices, has come to a screeching halt. Now we have rising rates plus inflation—which, while coming down from its pandemic and supply-chain fueled highs—is higher, like rates, than millions of Americans can remember.
Let me try and sum up what the trend suggests: The party’s over. And don’t think that it’s just lower-income Americans who are feeling the pinch. Nearly two-thirds of U.S. consumers (166 million) were living paycheck to paycheck in December 2022—including 51% of $100,000 households, according to a survey by LendingClub.
“The effects of inflation are eating into every American’s wallet and as the Fed’s efforts to curb inflation drive up the cost of debt, we are seeing near record numbers of Americans living paycheck to paycheck,” said financial health officer Anuj Nayar.
So let’s be thankful the job market is booming. Tens of millions are living paycheck to paycheck—but at least they have one. Hopefully inflation will continue to fall and give each of us some breathing room as we move deeper into 2023.
