3 Bubbles Building In The U.S. Economy

Although the market indices have been hitting record highs, there are structural problems that continue to build in the United States economy that may severely impact customer spending and corporate earnings in the next several years.

This article will outline three bubbles that are growing in the economy, along with a few potential ways to reduce your investment exposure to them.

None of these are “doomsday” bubbles, and each of them on their own is manageable; it’s the sum of all of them together that seems to be shaping up to cause long-term economic malaise if left unaddressed. 

Bubble 1) Student Loan Debt

The cost of higher education in the country has increased 4-5% per year over the last decade, dramatically outpacing inflation.

To account for this (and possibly also fueling some of this increase, as some would argue), the federal government has expanded its loan asset balance by tenfold in the past decade, from around $100 billion to over $1 trillion.

This is a rapid acceleration in a short period of time and puts the younger generation in uncharted territory as far as debt is concerned:

Federal Student Loan Assets

Source: St. Louis Federal Reserve

Student loans including from both public and private sources now exceed $1.3 trillion, and account for a larger segment of debt than either auto loans or credit card debt.  They are harder to discharge in bankruptcy than other types of debt, and have no collateral.

There are over 44 million Americans with student loans, and the average per-student debt at graduation among students that have loans is over $35,000. And although it disproportionally affects people under 40, approximately one third of total student debt is held by people over 40 years of age.  Plus, parents are often co-signers for the loans of their children, which exposes them to the risks.

According to the Wall Street Journal, 43% of student loans are either behind in payment or have received permission to defer payments due to financial hardship.

This bubble can impact stock returns in two key ways:

Bubble 2) Per Capita Healthcare Costs

The US pays far more per capita for healthcare than literally any other country in the world; approximately double the average of other developed countries:

Source: Peter G. Peterson Foundation, citing OECD data

And yet, the US does not have better health outcomes than average; life expectancy is mediocre and infant mortality is not that low, among other metrics.

Measuring healthcare effectiveness is a complex subject, but clearly the US is not getting its full money’s worth. Visual Capitalist has an excellent chart that shows how the US has fallen behind in life expectancy while doubling the healthcare costs of every other developed nation.

Many companies charge far higher prices for drugs in the United States than they charge elsewhere, because we lack the same level of price negotiation as many other countries have.  In this sense, we subsidize other countries.

More alarming is that this spending continues to grow at nearly 6% per year.  Healthcare spending as a percentage of GDP was 12% in 1990, and it’s now up to 18% of GDP just a quarter century later, according to the Centers for Medicare and Medicaid Services.  This is expected to increase to over 20% of GDP by 2025.