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The post-COVID recession that never arrived still hasn’t come. But that doesn’t mean Americans are in the clear.
Recession-like conditions are already gripping households on the lower end of the income spectrum, putting a dark spin on the saying that the future is already here, it’s just not evenly distributed.
That the wealthiest Americans are driving the bulk of consumption has reignited discussion of the K-shaped economy. And while the tendency is to think that markets might be in trouble if those big spenders pull back, the pressure felt by those on the lower rungs can have its own cascading effects.
“What does keep me up is what’s happening at the lower ends of the income distribution for households where there is significant pressure,” said Mohamed El-Erian, chief economic adviser at Allianz, in an interview during Yahoo Finance’s annual Invest conference.
El-Erian warned that the cohort of lower earners isn’t already in a recession, but they are close to one, raising the prominence of economic and political debate around affordability.
Faced with the price shocks of the COVID era, consumers pushed through on the winds of government subsidies, wage growth, and a job environment where moving around meant a pay bump. But with inflation stuck at 3%, El-Erian said, the affordability crunch this time around doesn’t come with economic cushions to offset the difficulties.
Without two months of official government employment data, owing to the shutdown in Washington, economists are less certain about the health of the labor market. But private-sector data is not reassuring. And even when the figures are positive, the gains are moderate.
El-Erian pointed to last week’s report from global outplacement and executive coaching firm Challenger, Gray & Christmas showing that layoffs hit the highest level for October in over 20 years as employers shed over 150,000 jobs, up 183% from the 54,064 job cuts in September. And the job gains revealed by payroll processor ADP’s most recent monthly report came in at a modest 42,000.
“There is real concern of the bottom bit of what people call the K-shaped economy,” El-Erian said, “And this is not an isolated concern. If lower-income households stop spending, not because they don’t want to spend, but they’re not able to spend, that will contaminate upwards for the economy as a whole.”