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Eric Schulzke
At 20, Kayley Jones is debt free, paid cash for a car, rents her own place and has ample savings in the bank. In a rough job market and a stagnant economy, making early hard choices has become critical for emerging adults.
I continuously remind myself of reasons to save. I might need a new car soon. I need money to start my business. I need to start a retirement. I might need to find a new apartment. I might have all of the above needing to happen at once. —Kayley Jones

Kayley Jones can think of three things she'd like to own: a nice SLR camera, a better violin to replace the one she used growing up and a more powerful laptop with better graphics. At the moment, she could "afford" any of these. But she is not all that tempted.

"I don't really need a lot of things," said the petite, energetic hairstylist from Auburn, Calif. "I'd rather have the money."

When the subprime crisis exploded and the market crashed in the fall of 2008, Jones was just 15. Now 20, she has only vague memories of the crash itself.

But she lives with its effects every day, and in ways she may not entirely recognize, the new economic landscape seems to have shaped her attitudes toward education, careers, savings and material consumption.

Since Jones entered the workforce, median income has fallen and now seems stalled. Credit card debt has come down slightly, but student debt has skyrocketed. Savings rates remain near historic lows, and the ratio of employed workers to population plunged after the crash and has yet to budge. Some economists have begun to speak of a "lost decade," analogous to that suffered by Japan in the 1990s and beyond.

The resulting picture is much more focused and somber than Jones' parents would have seen at her age, in the go-go '80s and '90s, an era of prosperity with plentiful jobs, rising income levels, falling savings rates and high levels of consumer debt.

The new economics are forcing young people like Jones to confront head-on difficult choices about education, careers, debt burdens and the time value of money.

Her own trend

Jones seems in many ways a natural fit for the new economy. She is naturally frugal and seems to enjoy the challenge of self-discipline.

"I continuously remind myself of reasons to save," Jones said. "I might need a new car soon. I need money to start my business. I need to start a retirement. I might need to find a new apartment. I might have all of the above needing to happen at once. Worst-case scenarios tend to haunt the financial side of my brain."

A home-schooler through her early years, Jones started attending a local junior college when she was 15. She toyed with pursuing a music degree but decided she liked the assurance and flexibility of hairstyling and cosmetology. Being able to balance that skill with family life down the road was an important factor, she said. She also wanted to avoid student debt and become self-sufficent as quickly as possible.

Jones recently paid cash for a used Toyota Camry, has no debt, pays rent for her own place, has already set aside substantial savings and is now developing her own client base, looking toward opening her own studio.

She is unusual for her age bracket. In an era when many young people are piling on student loans on their way to degrees that might not lead to careers and an environment in which one recent poll found that 40 percent of recent graduates reported underemployment — holding no jobs or jobs that did not require their degree — Jones has steady work and no debt.

In a world that often seems torn between the "you can do anything" myth and the "I can't get a break" excuse, Jones appears to have found a path of hard work matched with realistic expectations.

Missing workers

Jones avoided the first pitfall of the new economy simply by being employed in her chosen profession. The Associated Press reported this spring that more than 53 percent of recent college graduates under 25 were unemployed or underemployed, many working in retail and food industry jobs. A recent Pew study found 53 percent in the same age bracket had moved in with their parents at some point in recent years or lived there now.

Jones might be allowed to enjoy a little schadenfreude if she noted a CNN story highlighting a jobless recent graduate in journalism and art history from the University of North Carolina, or the creative writing graduate profiled by AP who is now working in a bar and getting help with student loans from his parents.

But it's not just young people who are having a hard time cracking the job market. Unemployment and underemployment remains high, despite recent small drops in the traditional unemployment rate, currently hovering just over 7 percent.

Many experts reject the traditional unemployment measure because it leaves out some groups, including those who have become discouraged and quit looking for work, as well as those working part time because they can't find anything better. Both of these are captured in U6, an alternate unemployment measure (Figure 1), which remains mired at around 14 percent.

The employment-to-population ratio — which measures everyone working rather than trying to sort out the reasons some are not working — is an even more valuable measure, according to Keith Hall, former head of the president's Council of Economic Advisers and now a fellow at the Mercatus Institute in Fairfax, Va.

"I've argued for a quite awhile that we really should keep our eye on the employment ratio," Hall said, "because it gives you an idea of who is working to support the population."

That ratio dropped dramatically from 65 percent in the first years of the new century, stagnated during the boom years in between, collapsed again in the Great Recession and has shown no improvement during the recovery.

Modest expectations

Jones is employed, saving aggressively and living modestly. On the flip side, she's chosen a career with modest upward income potential.

She's developing her own studio, cultivating a higher-end clientele and hoping to earn $25 an hour once established. But even if she achieves that level, she will still barely brush against household median income. If Jones eventually shares household income with a spouse, as she intends to, her family's income may easily jump the median, of course.

Meanwhile, median household income, adjusted for inflation, collapsed in 2008 and has not recovered. That means people like Jones work just as long for less pay than they did 10 years ago.

Is stagnating or declining income the new normal?

"It's hard to say," said Gordon Green, a partner at Sentier Research, which compiles income data and adjusts it for various demographic factors. "We are on the fourth anniversary of this recovery, and we still have not gotten anywhere near where we were before, and for the past year and a half it's been pretty stagnant."

Sentier Research recently released a report showing that median income has fallen 4.4 percent since the official recovery began in 2009. Since 2000, income has fallen 7.2 percent. Breaking it down by demographics, Sentier finds some groups hit harder than others. Blacks' income has fallen 10.9 percent in the past four years, while households with three or more children under 18 years old lost 9.2 percent.

Jones finds herself in a number of hard-hit demographic groups. Those under 25 years old have lost 9.6 percent of their income since 2009, those living alone saw the figure decrease 8.4 percent and those with some college but no degree lost 9.8 percent.

For many on the lower rungs, this has been a dubious recovery at best.

Pump priming

"When income has flattened out at this lower level, people don't have as much money as they used to to make purchases," Green said. "It's a consumer-driven economy, so if they are not buying as much, then your growth rates in the economy are going to be slower."

For the moment, at least, consumers are spending. In fact, a key paradox of the new economy is that the flailing median income is now splitting apart from growing consumer spending, with spending shifting upward while income stagnates or falls (Figure 2).

That split between spending and income is possible, Hall said, as long as the increased spending comes from savings or from wealthier people above the median. This is one reason personal savings are critical to long-term growth: someone needs to be able to prime the pump without wealth or debt.

What is lacking in the current recovery, according to Hall, is the surge of hiring that usually accompanies renewed spending, as employers and consumers regain confidence. "We have not seen that recovery growth yet," Hall said.

To get that kind of growth, Hall said, some consumers would need to start buying things they don't really need, but he acknowledged the paradox that long-term growth and stability demands savings, not just current spending.

In any case, Jones is unlikely to contribute much to the short-term spending binge. Her self-interest and her focus both lie in saving, not spending.

Off the debt grid

When income stagnates, consumers are tempted, even encouraged, to take on consumer debt to spend money anyway, even if it means taking on debt. During the boom years of the 1990s and in the housing bubble preceding the Great Recession, they didn't need any encouragement (Figure 3).

After the crash, consumers ratcheted down on auto loans and credit cards. Auto borrowing has snapped back upward since the worst of the recession ended, but credit cards have not. Not evidenced in this graph, which begins in 2004, is that both auto loans and credit cards experienced their own steep climb throughout the 1990s.

Money is not free, of course. Consumer debt burdens in recent decades have cramped cash flow, reflected in the debt service ratio (Figure 4), which is the percentage of disposable income spent on debt payments.

The debt service ratio briefly jumped over 11 percent in the late 1980s before quickly crashing, but then it rose steadily to a 14 percent peak in 2007. Debt ratios ought to be closely tied to interest rates, but Figure 4 shows no connection. A steady collapse of mortgage rates over the past two decades did not prevent a steep climb in debt service beginning in 1995 and peaking in 2007.

Savings reached historic lows by 2007, recovering slightly after the crash. There is a tight coupling between personal saving rates and falling interest rates (Figure 5), though the cause and effect are not clear. Interest-rate drops generally appear to follow drops in savings rates, suggesting people are eating up savings because of a sour economy, which the Federal Reserve follows by lowering interest rates.

Still, it is not surprising people don't save when savings offer low returns.

The personal savings rate is calculated by taking disposable income and subtracting consumption. Anything not consumed is considered saved, including retirement savings. The savings rate also includes debt principal payments. So heavy debt burdens may actually lead to overstated savings.

Kayley Jones, of course, is completely off the debt grid. She has set aside a substantial portion of her earnings in savings, though with savings interest rates near zero, she is getting little in return. She might well be cheering for the Federal Reserve to allow interest rates to climb.

That makes her a bit of an oddity. It's a difference she can live with.

Email: eschulzke@desnews.com