Mohamed El-Erian, chief economic adviser at Allianz, is warning that lower-income Americans are under “significant pressure” and that a halt to their spending would weigh on the economy as a whole.
“This is not an isolated concern if the lower household incomes 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,” El-Erian said in an interview during Yahoo Finance’s annual Invest conference.
The economy has become increasingly bifurcated as higher-income consumers continue to spend while lower-income households have been forced to pull back. El-Erian said that lower-income consumers are “near recession” at a time when inflation is stuck at 3%, layoffs are surging, AI is changing the workforce, and debt levels are high as credit cards have been maxed out.
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Private-sector data is signaling weakness in the job market as employers aim to cut costs and use AI at the margins. Last week, global outplacement and executive coaching firm Challenger, Gray & Christmas reported 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. Meanwhile, payroll processor ADP’s most recent monthly report found businesses added 42,000 private-sector jobs last month, compared with a loss of 29,000 in September.
El-Erian said what keeps him up at night is no longer the specter of a trade war from higher tariffs, but low-income consumers who are carrying large debt loads and the risk that they have to refinance at higher interest rates.
This fall, delinquencies on subprime auto loans caused small and large banks alike to take losses, raising questions about whether the economy is turning, given that subprime borrowers typically are the first to default, as well as the potential for larger credit issues. Jamie Dimon, CEO of JPMorgan Chase, one of the companies that incurred subprime auto loan losses, famously warned that where there is one cockroach, there could be more.
El-Erian offered the analogy that while there may be cockroaches lurking in the credit system, there aren’t termites, which eat away at the integrity of the foundation.
“We’ll have some economic accidents, but I don’t think we’re going to have any systemic shock,” El-Erian said.
He noted that people have stretched their finances with encouragement from a strong economy, a high stock market, and lower borrowing rates right after the pandemic.
