The American Dream Accelerates Away From Those in the Slow Lane

The American Dream Accelerates Away From Those in the Slow Lane
The American Dream Accelerates Away From Those in the Slow Lane


It is terrible news for consumers who have been left behind, and bad too for investors in the companies that sell to them.

Much of America’s two-speed economy is powering ahead, but it’s left a trail of destruction behind it.

The laggards are starting to get into serious trouble, with the worst-hit, low-income consumers held back by powerful forces: higher interest rates, inflation and the depletion of pandemic-era support. This is terrible news for those left behind, and bad too for investors in the companies that sell to them. It’s also hitting companies that are laggards themselves, indebted and caught out by changes in the economy.

Here’s why:

Higher rates hit selectively. Those who borrowed or refinanced at pandemic-era near-zero rates—companies and homeowners with both sense and a solid credit score—haven’t been hit by the highest rates in four decades. Who has been hit hard: Borrowers who didn’t qualify for long-term fixed-rate loans and people who want to borrow now.

Borrowers with lower credit scores take loans that are more expensive and often don’t have fixed rates. Credit-card rates soared as the Fed tightened, from a postpandemic low of 16% to almost 23% for borrowers who don’t pay in full each month.

The same goes for firms. Low-rated junk-bond issuers continued to issue short-dated bonds in 2021 while sturdier investment-grade companies locked in low rates for, on average, the longest this century.

Since then, yields on CCC bonds, which are close to default, have doubled to 13%. According to ratings agency Moody’s, junk-rated borrowers were much more likely to be downgraded even further last year, a sign of their difficulties, than were investment-grade borrowers.

Heavily indebted firms typically have to roll over debt frequently—which has become much more expensive. For relatively healthy businesses, higher debt costs hit profit margins. For those already struggling, such as office-building owners facing a work-from-home-driven demand slump, it can be the final straw.

Anyone who wants to buy a house or a car faces a double whammy of higher prices and far higher rates. Few are even bothering to apply for a mortgage, with applications for loans to buy a home in the past year at their lowest since 1995. Those who have already achieved the American dream are fine, but it’s getting further away for those still reaching for it.

Inflation hurt low-income households more. The cost of food, energy and rent rose far more than other items after the start of the pandemic, and made up a bigger share of consumption for the poor. Inflation experienced by the poorest fifth of society was 1.6 percentage points higher than for the richest fifth from March 2020 to June 2023, according to the latest data available from the Bureau of Labor Statistics.

Against that, jobs have been plentiful and wages for low-end jobs have risen faster than for top jobs. Until the past year, low-end wages rose fast enough to more than offset the higher inflation, according to figures from the Atlanta Fed.

But in the past year, wage rises have been similar for all income levels. Inflation by income group isn’t available, but is also likely to be mixed, with energy prices down and rent up faster than other prices.

The combination of higher prices and higher interest rates has been toxic for many low-end consumers—especially the young. The share of borrowers younger than 30 missing three monthly credit-card or auto-loan payments reached the highest last year since the 2008-09 financial crisis, according to New York Fed data. A detailed study the New York Fed did of auto loans showed the steepest rise in borrowers missing payments occurred in low-income regions.

Pandemic savings have run down. The Federal Reserve concluded at the end of last year that “excess" savings accumulated during the pandemic have been run down, and depending on the method used have either run out altogether or are close to it. Low-income consumers spent their excess-cash cushion earlier, according to other studies, which helps explain why they are struggling more with debt.

For investors this shows up in the share prices of companies whose customers are stuck in the slow lane. Dollar stores, McDonald’s and KFC owner Yum Brands were all underperforming the S&P 500 even before warnings from several of them during the past two weeks about the troubles of low-income consumers.

Lenders and suppliers to the slow parts of the economy have suffered too. Regional banks tend to lend more against office buildings, and their shares have been hit hard. New York Community Bank’s problems were exacerbated by high rates. Suppliers to and developers of wind farms, which are often leveraged 20:1, have had a rocky time too.

The longer rates stay high, the more they will hurt. Even solid companies will have to refinance at the new rates eventually, while more homeowners with low-rate mortgages will face the difficult choice between keeping the low rate and paying a higher rate to move for work or family reasons.

Still, the troubles of those stuck in the slow lane aren’t holding the economy back significantly. Investors need to think about this group when choosing stocks, but overall consumption is driven by better-off consumers and companies. For now, that’s enough to prevent the problems from putting the brakes on the wider market.

Write to James Mackintosh at

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