Consumers Should Take Advantage of the Stronger Economy to Reduce Debt
As a follow-up to last week’s economic update, the 2nd quarter US growth figures were released last week confirming their GDP grew 4.1%. While there is no surprise that the $1.5 Trillion in tax cuts continued to grow the US economy in the 2nd quarter there are some interesting trends under the surface which are causing some concern:
Housing growth slows down
Housing growth is slowing – New and existing US home sales slowed 5.6% in May and 0.6% in June. For the first time since 2013, existing home inventories in the US have grown.
Spending trends between income earner groups
A recent Reuters analysis of US household data shows that the bottom 60% of income earners account for most of the rise in consumer spending – The US domestic economy accounts for roughly 70% of US economic growth. The real story here is that the top 40% of earners have increased their financial cushion rather than spending or borrowing. The savings rate in the US is at its lowest point since 2005. Similar to Canada, US debt levels have increased steadily as access to credit for all segments of the population became easier as the economy strengthened.
Rising interest rates, trade disputes and slow wage growth
With interest rates on the rise, the US cost of debt has risen causing a spike in credit card and unsecured lending delinquencies. While their economy remains strong with a tight labour market, trade disputes and slow wage growth are affecting the majority of US workers. The lingering problem with the US economic recovery has been a significant improvement in the number of jobs, but only a modest improvement in wage growth. Some folks are taking on part-time jobs to help improve their finances. While there are no immediate threats of an economic downturn, the picture in the US isn’t as rosy as recent headlines suggest.
Tax cut benefits have a time limit
We expect by the end of 2018, the benefit of recent tax cuts on the US economy will have run their course. Will new trade deals and a tiring domestic consumption continue to propel the US economy? We believe so and remain positive the US will continue to grow into 2019 albeit at a slower pace.
What can we take away from the recent US information?
With rising interest rates, high levels of consumer debt and slowing housing market, Canada’s domestic economy has become less of an economic driver. With exports and global demand for Canadian products now fueling our economy, we see some concerning signs about our largest trading partner. In our view, this means it makes even more sense for Canadian consumers to be careful with their finances. Our team can help with a comprehensive debt management plan to reduce interest costs and to help clients get ahead while the economy remains strong. Conversely, those who are already in a good fiscal position can take advantage of falling prices in certain segments and make a move up the property ladder.