Investing legend Mohamed El-Erian says he’s kept up at night by 2 big problems with the US economy

• Mohamed El-Erian says he stays up at night worrying about two problems in the US.

• Lower-income consumers could pull back on spending and “contaminate” the rest of the economy, he said.

• He’s also watching for potential credit “accidents” as debt gets refinanced at higher rates.

There are two things going on in the economy that are preventing Mohamed El-Erian from getting a good night’s sleep.

The famed economist and chief economic advisor at Allianz spoke about his biggest concerns revolving around the US economy when speaking to Yahoo! Finance this week.

El-Erian flagged two issues in particular that he said were keeping him up at night: the health of lower-income consumers, and the piles of debt in the economy that could be refinanced in the coming years.

“Those two things are potential areas of pressure — which would be made worse if we get a policy mistake,” the former PIMCO CEO said.

Here’s what El-Erian sees potentially going wrong:

Lower-earning households are under “significant” financial pressure, a pain point that could spread throughout the economy if lower-income Americans start to significantly rein in their spending, El-Erian said.

He pointed to the accumulated burden of higher inflation and higher debt that the cohort has faced in recent years.

Inflation, for one, has outpaced the after-tax wage growth for lower-income households in the US since the start of the year, researchers at Bank of America said in a report this week.

Americans are also facing larger debt burdens. Total household debt in the US swelled by another $197 billion over the third quarter to $18.5 trillion, according to the latest data from the New York Fed.

Many Americans are also feeling unsure about their future income, El-Erian added, pointing to recent signs of weakness in the job market. The labor market saw its worst October for layoffs in more than two decades. Concerns are also rising around AI potentially replacing jobs.

Those pressures are already starting to catch up with lower-income Americans. The group is seeing the largest increase in households that are living paycheck to paycheck, or that are spending more than 95% of their income on necessities, BofA found.

“They’re near a recession,” El-Erian said. “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,” he added.

Consumer spending is a major component of economic growth, making up around 68% of the US’s GDP.

The US—both public and private sectors—has accumulated a lot of debt in recent years. The worry is that much of that will likely have to be refinanced at higher rates, potentially putting pressure on borrowers.

That issue could be particularly prevalent in sectors like commercial real estate, where a wave of loans that were taken out at lower rates during the pandemic is now reaching maturity. More than $21 billion worth of office loans that back commercial mortgage-backed securities are coming due by the end of 2026, according to a September analysis from CoStar.

The economy has also flashed other signs of borrower distress. The delinquency rate on all loans at commercial banks has climbed steadily higher for most of the past two years, according to Fed data.

US bankruptcies, meanwhile, soared to their highest level in five years this summer.

Still, El-Erian brushed off the idea that the US is heading for anything that would resemble a financial or credit crisis.

“Cockroaches are unpleasant. They come in groups but they don’t eat away at the integrity of the system,” he said, referring to a recent comment from JPMorgan boss Jamie Dimon about “cockroaches” in private credit lurking in the system.

“I don’t think we should be surprised that we will have these accidents, these credit accidents. We’ll have some economic accidents, but I don’t think we’re going to have any systemic shock,” El-Erian added.

Read the original article on Business Insider