SVP, Chief Investment Officer and Economist
With all the headlines regarding the banking system recently, it might be easy to lose focus on what is happening in the economy. As I have discussed previously, the consumer is the engine that drives the economy. Since the average worker most likely does not have over $250,000 on deposit with their local financial institution, the drama over FDIC insurance is probably not at the top of their list of things to worry about regarding their financial situation. The average worker is far more likely to be focused on paying their bills and taking care of themselves and/or loved ones. As a result, I am going to dive back into the Census Bureau data to give information and provide perspective on what type of stress may exist for the average worker when it comes to paying their bills. One of the data points that the Census Bureau collects as part of its Household Pulse survey is the level of difficulty a respondent indicates they experience in paying their usual household expenses in the last seven days. The four choices are:
- Not at all difficult
- A little difficult
- Somewhat difficult
- Very difficult
I am going to focus on the percent of respondents who indicated some level of difficulty (A little, Somewhat or Very) in the last seven days.
The data is from the Census Bureau and the most recent set of data is as of 2/13/23. For those who have read my newsletter for a while you may notice a different start date than some of the other data that I have covered from the Household Pulse survey. The first week of the Household Survey was April 23 through May 5 of 2020, but the Census Bureau did not begin asking the “level of difficulty” question until the week of 8/19/20.
Let us start by looking at the macro picture for all respondents. I will then drill down and look at the data at the income level.
Based on the data from the Census Bureau, as of 2/13/23, 63.6% of Americans are experiencing some level of difficulty in paying their usual household expenses.
- 27.4% are finding it a little difficult to pay their bills,
- 20.33% are finding it somewhat difficult,
- 15.99% are finding it very difficult.
The graph highlights the impact of the three stimulus checks and other fiscal support packages on the average worker’s ability to pay their bills. The last of the stimulus checks occurred in March of 2021 and that is where the percentage drops off. September of 2022 saw the end of many of the fiscal support programs and the percent of people having difficulty paying their bills rose. As inflation rose and people’s expenses grew faster than their wages, the percent of people experiencing some level of difficulty paying their usual household expenses grew even more. Since wage growth remains negative, the percentage of people having some level of difficulty paying their bills has remained elevated.
The total does not give us sufficient insight into who is being impacted the most. The following graphs shows the information broken down by the income levels used by the Census Bureau.
The lowest income bracket is suffering the most stress when it comes to paying their bills. The total percentage is showing a slight decline, which is because those who are experiencing the least difficulty (i.e., a little difficult) has declined. Unfortunately, the percent of people finding it very difficult to pay their bills is rising.
- 87.9% of people making $25,000 or less are having some level of difficulty paying their bills.
- Those finding it a little difficult to pay their bills: 23.3%
- Those finding it somewhat difficult to pay their bills: 26.8%
- Those finding it very difficult to pay their bills: 37.8%
The picture is similar for the next lowest income bracket.
- 87.2% of those who make between $25,000-$34,999 are experiencing some level of difficulty paying their bills.
28.55% find it a little difficult,
27.9% find it somewhat difficult,
30.5% find it very difficult.
The overall trend for those in the 3rd lowest income bracket is a bit different than the bottom two income brackets. The overall trend is rising slightly, driven by those who a finding it somewhat difficult to pay their bills. The good news is that the percent of those who are finding it very difficult to pay their bills has declined marginally.
- 83.0% of those making between $35,000-$49,999 are experiencing some level of difficulty paying their bills.
- 30.7% are finding it a little difficult,
- 27.4% are finding it somewhat difficult,
- 24.9% are finding it very difficult.
Those who earn between $50,000-$74,999 are seeing a similar pattern as those making between $35,000-$49,999. For this income bracket, it is also the percent of those finding it somewhat difficult to pay their bills that is rising slightly.
- 76.7% of those making between $50,000-$74,999 are experiencing some level of difficulty paying their bills.
- 33.6% find it a little difficult,
- 26.5% find it somewhat difficult,
- 16.7% find it very difficult.
This income bracket is experiencing a steady rise in the overall percent of people experiencing some level of difficulty paying their bills. This is due to a steady rise in those who are finding it a little difficult to pay their bills.
- 67.9% of this income bracket are finding it a little difficult to pay their bills.
- 34.8% are finding it a little difficult,
- 22.1% are finding it somewhat difficult,
- 11.1% find it very difficult.
The picture for this income bracket is the same as those making between $75,000-$99,999.
- 57.9% of those people in this income bracket are experiencing some level of difficulty paying their bills.
- 33.0% find it a little difficult,
- 17.2% find it somewhat difficult,
- 7.7% find it very difficult.
It may sound like a broken record, but the story for this income bracket is the same as the previous two income brackets.
- 46.1% people in this income bracket are experiencing some level of difficulty paying their bills.
- 29.8% are finding it a little difficult,
- 12.6% are finding it somewhat difficult,
- 3.7% are finding it very difficult.
Yes, even people making over $200,000 are experiencing some level of stress in paying their usual household expenses. Clearly, the percentages are far lower, but they are not zero.
- 26.6% are experiencing some level of difficulty paying their bills.
- 17.9% find it a little difficult,
- 6.8% find it somewhat difficult,
- 1.8% find it very difficult.
The graphs illustrate the impact of the fiscal stimulus provided to many households during the pandemic crisis.
- The decline in the percentage of people experiencing some level of difficulty in paying their usual household expenses coincides with the third round of stimulus support being distributed.
- You can see how the percentage rose starting at the end of September in 2021. This is most likely due to the end of the extended unemployment benefits and no more stimulus checks.
- As we entered 2022, the consequences of stimulating demand without increasing supply showed up — inflation. Rising inflation created negative real wage growth (i.e., expense growth faster than wage growth).
- The average worker has experienced 23 consecutive months of negative wage growth. As the graph illustrates, this has increased the percentage of people who are experiencing some level of difficulty in paying their usual household expenses.
It is a bit sobering to realize that almost 65% of Americans say that they are experiencing some level of difficulty in paying their normal household expenses.
- It may sound like confirmation bias on my end, but to me this is another measure that shows consumers under financial stress. As long as wage growth is negative, I believe that stress will grow as consumers use up their backup sources for paying their bills. Once they use up those resources (savings, credit cards and home equity), the consumer will be forced to reduce spending and, to me, that would be the formula for the start of a recession.
This data is another reminder that the macro picture does not always give us the full story.
- Six out of the eight income brackets have more than 50% of the people experiencing some level of difficulty paying their bills.
- More that 75% of people making less than $150,000 are experiencing some level of difficulty paying their bills.
- Economists and analysts may argue that the consumer is in good shape financially; the consumer is saying something different.
To use an analogy that may make some of you go “ewww”, the way I would describe this economic process is similar to a house with mold. It usually starts at the ground level and slowly spreads its way upward until the whole house is “infected” with mold. For the economy it may play out as follows:
- The lowest income brackets are being hit the worst and may clearly argue that they are already in recession. As they are forced to cut back spending it starts to affect more people who rely on their spending.
- The combination of negative wage growth and slowing business conditions then starts to negatively impact more people in the middle-income brackets.
- The fact that the “a little difficult” category is on the rise for those in the $75,000-$199,999 income brackets may be the first sign that it is starting to spread to the middle- and upper-income brackets. This will bear watching.
- Ultimately, as more and more people are impacted, the economy becomes “infected” and tips into recession.
People ask me how we will know when we are in a recession. Since recessions are unique for each person, I always advocate that you pay attention to what is happening around you in real-time.
- The official recession arbiter (National Bureau of Economic Research) will usually be the last to declare a recession and it will be a hindsight view (i.e., declared after the recession is well underway).
- Official economic data is usually at least a month old and will not be real-time indicator for you.
- I have no perfect answer but some of the “what is happening around me?” indicators that you might consider:
- If you go into a mall, are people walking around with bags of good purchased or are they just walking around?
- What do you see people buying at the grocery store? Is it basic goods and store brand goods or is it more “treats” type of purchases. No, I am not telling you to stop people and inspect what they are buying! Simply observe as you walk down the aisles.
- What is airport traffic like? Are there long lines through TSA or is it sparse?
- You can make the same observations for airport parking. Is the covered parking full or is everyone choosing the cheaper outside lots?
- What is traffic like when you go to work (assuming you go into the office)?
- Are there any changes to the lifestyle patterns of your neighbors?
- Are they still leasing fancy cars, or did they suddenly buy a used car?
- If they are frequent vacationers, have they stopped vacationing?
- Are some of the “toys” suddenly for sale?
My message regarding recessions remains the same:
- Stay focused on what has made you successful. I am pretty sure staying glued to the blaring headlines of social media is NOT what made you successful.
- Recessions are a normal part of the business cycle.
- Recessions are not to be feared if you plan for them in advance.
- Recessions almost always create opportunities for those who prepared in advance.
- The Department of Labor reported a 1,000 decrease in initial jobless claims. Total initial claims are 191,000. We continue to see the pattern that people being laid off are able to find a new job quickly enough to avoid needing to apply for unemployment benefits. Total continuing claims rose from 1,680,000 to 1,694,000.
- The National Association of Realtors reported a 14.5% increase in existing home sales in February after experiencing a 0.7% decline in January.
- The Census Bureau reported a 1.1% rise in new home sales in February. The rise was primarily due to a large downward revision to January’s data. January originally showed a 7.2% increase and that was revised down to a 1.8% increase.
- The Mortgage Bankers Association reported a 3.0% increase in mortgage applications last week. This continued the positive momentum of increased applications. March is traditionally the start of the home buying season, so we will need to watch to see if this momentum continues. The recent drop in mortgage rates should help.
- The Kansas City Federal Reserve reported a drop in its service sector activity index. The index fell to a negative 4 level in March from a positive 1 in February. A level below zero indicates the sector is contracting.
- The Philadelphia Federal Reserve reported a sharp decline in its service sector activity index. The index fell from a reading of 3.2 in February to a negative 12.8 in March. This region’s service sector activity is also contracting.
- S&P Global reported a rise in its service sector activity index. The index rose from 50.6 in February to 53.8 in March.
- The Census Bureau reported a 1.0% decline in durable goods orders in February. This was an improvement compared to the 5.0% decline in January.
- S&P Global reported an improvement in its manufacturing index. The index rose from 47.3 in February to 49.3 in March.
Now that Spring is officially here, we have probably run out of excuses for attending to yard work or other outside maintenance. Break out the “honey do” list and enjoy your weekend!