How the virus will hurt the fragile finances of America's middle class

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 stopped travelling and shopping, business revenue plummeted and millions were thrown out of work. The country’s middle-income group is ill-prepared for such a shock, according to the latest update of household-finance data from the Federal Reserve.

Here we examine the balance-sheets of middle class Americans, families with incomes between roughly $25,000 (Dh91,829) and $110,000 a year.

The squeezed middle

This cohort’s share of the US national wealth has been reduced to the smallest since the Fed began keeping these kind of records in 1989 – dropping below 25 per cent 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.

They have debt of the wrong kind

US 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.

Cheap money won't help them

Last month, the Fed slashed its already-low benchmark interest rate to zero during the current crisis. And the virus rescue package agreed by the Trump administration and Congress will relieve households from the burden of some debts, such as student loans.

But there may be less that policymakers can do to narrow the record gap between borrowing costs for the US government and the ones paid by users of credit cards. The former have been plunging towards zero this year – while the latter are comfortably above 15 per cent.

About 110 million US adults had credit card debt at the start of the coronavirus outbreak, according to new data from CreditCards.com. Almost two-thirds ran up the debt to pay for necessities like groceries, childcare or medical treatment.

“Many adults were already teetering on the financial edge, reliant on credit cards to pay for day-to-day bills and emergencies at the start of the Covid-19 outbreak,” said CreditCards.com analyst Ted Rossman. “Circumstances can change in an instant. What many believed was manageable credit card debt has suddenly turned into a situation of uncertainty.”

Going delinquent

Even before the virus arrived, signs of strain in US consumer finances were reflected in the credit-card market. In particular, they were showing up in delinquencies at smaller issuers of cards, which soared to record highs at the end of 2019. Those kind of lenders are more likely to cater to less-wealthy households, while the bigger banks have shifted their customer profile towards high-rated borrowers since 2008.

Cash buffer

When it comes to liquid assets such as checkable deposits and currency, middle-class Americans are better off than they were before the crash of 2008, when households had been dipping into their savings for years.

After coming close to rock-bottom, the cohort’s holdings of these assets – measured here on a per-capita basis, and adjusted for inflation – rose steadily for most of the last decade, although the advance has stalled over the last couple of years.

Home equity

Also shoring up the asset side of middle-class balance sheets – if not necessarily offering liquidity – has been the rise in real-estate equity, which has been outpacing home mortgage liabilities as the US recovered from its great housing crash.

Despite these gains, pension entitlements recently overtook real estate as the group’s largest asset class.