The coronavirus is set to overwhelm the precarious finances of America’s middle class, a group that’s seen its share of the national wealth decline steadily since the last financial crisis in 2008.
Economic activity has collapsed in the past few weeks as Americans stop traveling and shopping, business revenues plummet and millions are thrown out of work. The country’s middle-income group is likely ill-prepared for such a shock, according to the latest update of household-finance data from the Federal Reserve.
The middle class is defined here as excluding the richest 20% of Americans and the poorest 20%. That corresponds to families with incomes between roughly $25,000 and $110,000 a year.
Squeezed Middle
The cohort’s share of the U.S. national wealth has been reduced to the smallest since the Fed began keeping these kind of records in 1989 -- dropping below 25% at the end of 2019.
While the decline began earlier, it has gathered pace in the past decade or so. The real, wage-paying economy was slow to recover after the 2008 crisis. The value of financial assets, more likely to be held by the richest sliver of Americans, roared back much faster.
Debt: Wrong Kind
U.S. household debt is lower now, as a share of economic output, than it was before the last recession. And low interest rates have in the aggregate helped to keep servicing costs down.
But one trend in the composition of middle-class debt is more worrying. Among this cohort, the share of low-cost loans used to finance assets that will generally increase in value -- such as real estate -- has declined sharply. The group is now saddled with a bigger share of consumer debts, which typically come with higher interest rates.
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