Ordinary Americans are facing the toughest times in memory

Despite upbeat rhetoric and statistics on the economy, inflation has been a wrecking ball for most people, at the same time as the US faces its own fiscal crunch.

Chairman Jerome Powell said late August that the US Federal Reserve was prepared to raise interest rates higher to bring down above-target inflation, but would proceed ‘carefully’. Picture: AFP

In last week’s first Republican presidential debate, contender Vivek Ramaswamy drew criticism, especially from former vice-president Mike Pence, for sounding a sour note about America’s current state.

“It is not morning in America. We live in a dark moment,” Ramaswamy said candidly, shying away from the kneejerk optimism that colours most politicians’ speeches. But he was right – the bulk of Americans are living through the biggest decline in their living standards in memory.

For weeks now, President Joe Biden has been talking up the US economy, claiming a perceived improvement as the result of his own “Bidenomics” brand of economic policy.

“Our economy is stronger and better than any industrial nation in the world right now,” Biden said last month in remarks to celebrate the one-year anniversary of the giant Inflation Reduction Act.

On the surface, America’s economy does indeed appear much improved from the basket case left by Covid-19 restrictions.

The annual inflation rate has been falling steadily from a peak of 9.1 per cent in June last year to 3.2 per cent across the 12 months to July.

Economic growth has continually defied predictions of a recession, to the point where the Federal Reserve in July scrapped its forecast of one entirely in the lead-up to the election next year.

Vivek Ramaswamy drew fire for his candid remark about America’s ‘dark moment’. Picture: AFP

Most of all, despite some of the most rapid increases in interest rates in more than a generation, intended to snuff out inflation, employment growth has remained strong. The unemployment rate has hovered around 3.5 per cent, a level not seen since the booming 1960s, for the best part of 18 months. Yet the American public hasn’t bought the president’s upbeat rhetoric and statistics.

A CNN poll last month found 63 per cent of Americans don’t approve of how President Biden has handled the economy, up from 44 per cent just after he came into office in early 2021.

According to a Gallup poll published in May, the confidence of middle-income Americans about their own personal finances this year is at the lowest point since 2004. Only a third of Americans in the lowest household income group say they have enough to “live comfortably”, sharply down from 48 per cent in 2021 and from almost 60 per cent in 2002, according to the same survey.

They aren’t making it up. The aggregate statistics about employment and GDP growth touted by the White House, also the bread and butter of economic reporting, obscure a very different reality for most Americans, for whom inflation has been a wrecking ball for their standard of living.

Median weekly earnings for full-time workers in the US rose 5.7 per cent to $US1100 ($1700) across the 12 months to June, according to the Bureau of Labour Statistics, a little ahead of inflation during the same period.

But the purchasing power of those wages has declined more than 7 per cent since the middle of 2020 – according to the Federal Reserve statistics, the biggest drop in a handful of years since the late 1970s, a period most Americans couldn’t remember.

At the same time as their purchasing power has fallen, the cost of the two biggest purchases most young Americans make, or would like to make, have skyrocketed.

Across the decade to March 2020, the consumer price index for used cars in the US, the sort lower-income Americans can afford, fell slightly. Since then, it has soared by more than 40 per cent.

The story is even more dire for home buyers.

Across the five years to March 2020 the median sale price of houses sold in the US increased about 11 per cent to $US322,000. Since then, it has surged an incredible 29 per cent to $US416,000 ($642K), according to Fed statistics.

Since March 2020, the media house price across the US has surged an incredible 29 per cent to $US416,000.

At the same time, the average interest rates on a new 30-year fixed home loan has more than doubled to 7.2 per cent across the same period, making home ownership next to impossible for low-income Americans for the foreseeable future.

To be sure, the US stockmarket, as measured by the benchmark S&P 500 index, was 36 per cent higher this week compared with its level just before the Covid-19 pandemic saw equity prices tank globally, yet this is little solace to the bulk of Americans who have little net wealth.

The household at the 25th percentile of wealth distribution – in other words, richer than about 30 million other households – had net wealth of $US16,560 in 2021, according to the US census.

No wonder, then, that national credit card balances in the US surpassed $US1 trillion for the first time in the second quarter of this year, up 4.6 per cent over the year, according to the New York Fed’s latest Quarterly Report on Household Debt and Credit.

It’s not only ordinary Americans facing fiscal difficulty. US government spending remains significantly higher than taxation, even with a jobless rate at record lows, in a way that’s unsustainable. Either taxes will have to increase or benefits will need to be slashed.

The higher US stockmarket is little solace to the bulk of Americans who have little net wealth. Picture: Bloomberg

The giant trust funds that pay for US social security (age pensions) and Medicare are on track to become insolvent in 2034 and 2028, respectively.

As a big debate in congress looms over whether to provide a further $US24bn in aid to Ukraine, it’s often forgotten the US doesn’t really have the money to give.

The federal government’s total debt has increased by more than $US1.3 trillion, since the artificial debt ceiling was suspended in June after a congressional stoush, and is fast approaching $US33 trillion. Were a serious war to arise, the US is saddled with World War II-level debts before it even starts fighting.

Ratings agency Fitch’s decision to strip the US of its coveted AAA credit rating, after Standard & Poor’s did the same in 2011 following an early debt ceiling crisis, was a reminder of this deteriorating fiscal position.

The independent Congressional Budget Office estimates US budget deficits for the fiscal year ended September 30 will be $US1.7 trillion, twice that of last year. “To put this escalating figure in perspective, government debt as a percentage of GDP in the year 2000 stood below 50 per cent, whereas US government debt today stands at 118.6 per cent,” concluded a recent analysis note by Malmgren-Glinsman Partners.

How, then, does the US economy continue to defy predictions of recession at the aggregate level? Annual economic growth, around 70 per cent of which is consumer spending, has remained a surprisingly robust 2 per cent since the middle of last year.

Enormous fiscal stimulus to households and small business during the pandemic saw household savings rise $US2.1 trillion beyond what they would have been, according to recent analysis by the San Francisco Fed.

But the money-printing spigot stopped in late 2021 and consumers have been spending down their savings, with about $US500bn left by March this year.

“Should the recent pace of drawdowns persist … aggregate excess savings would likely continue to support household spending at least into the fourth quarter of 2023,” the San Francisco Fed analysis concluded, offering a suggestion over when the rosy overall spending statistics might start to reflect most Americans’ economic reality.

Private and public finances could both be in for a rocky 2024, a presidential election year, as households rein in their spending to match their newly poorer reality and the US government starts to realise it cannot keep increasing its debt.

Celebrating US economic conditions, indeed claiming them as a proud outcome of Bidenomics, could prove a risky strategy for Democrats.