U.S. households may be borrowing more to fuel their spending as wages grow slowly, according to Wells Fargo & Co.
Consumer spending may be rising because Americans are growing more confident, analysts John McElravey and Ryan Brinkoetter wrote in a presentation to clients Monday. Savings rates are falling, and a measure of debt levels has been edging higher relative to income recently after plunging in the years following the crisis.
“Debt may be filling the gap for many households when incomes have not kept pace with rising living expenses," the analysts wrote. "A reversal may be ahead if income growth does not catch up to consumer expectations."
Lower income consumers have been showing signs of weakness, because their income has been growing slower than that of wealthier Americans. The pockets of weakness may explain why some asset-backed securities are performing worse even as the unemployment rate dropped in January and consumer confidence and income growth expectations are strong, the analysts said. They said the consumer credit cycle "appears to be maturing," though faster economic growth could benefit more vulnerable consumers.
Rising education debt may also be crimping consumers’ demand for other kinds of debt, according to the analysts. Total student loan debt reached $1.36 trillion in the third-quarter of 2017, according to the Federal Reserve Bank of New York. That’s up from $530 billion a decade earlier, and is the largest share of non-housing debt. It’s also "significantly more burdensome" for lower income households, the analysts said.
Many lower-income households still have lower net worths than they did 15 years ago. Rising asset values have helped generate wealth, but many lower net worth households don’t have retirement accounts, investment funds or stock holdings. They also typically don’t own homes or businesses, meaning they’ve missed out on rising nonfinancial asset appreciation as well.
Despite a low unemployment rate, "a significant cohort" of workers have been unemployed for a long time, suggesting a structural shift in the economy compared to past economic cycles. These workers may need re-training to find employment, the analysts said. An elevated share of part-time workers also signals a changing economy.