Americans struggle with financial stress
Expenses exceed income for many, study shows
Despite an improving economy that should be easing the financial struggles of all Americans, a growing number of low- and middle-income households are plagued by high debt and have little or no savings. ❚ The financial strains have especially worsened for those near the bottom of the income ladder.
While wages for low- and middleincome Americans are rising, they’re not keeping up with higher costs, such as rent and utilities. That means these households aren’t riding the hopeful trends lifting many families: unemployment tumbling to 4.1% today from 10% in 2009, debt levels close to record lows, climbing consumer confidence and spending.
They are people such as Alejandra Mejia of San Jose, whose paycheck can’t cover higher housing costs. Or Dawn Thorp, in Phoenix, whose disability payments don’t offset higher gasoline prices, electric bills or rent.
According to a UBS study, such households could fall behind on loan payments, reduce their spending and slow or even undercut a U.S. economy that seems to be firing on all cylinders for the first time since the Great Recession ended in 2009.
“You have a large share of the population who are struggling to meet their financial obligations and has seen modest to no improvement,” UBS Credit Strategist Stephen Caprio says.
❚ ‘Stressed’: About 76 million U.S. households make up the bottom
60% of income earners, with takehome pay of $65,000 or less. Of that group, about a third were “stressed” in 2016, UBS says, near the highest level since the mid-1990s. UBS defines “stressed” Americans as those whose financial obligations — such as mortgages, rent, auto loans and leases, and credit card bills — exceed 30% of their income and who don’t have enough cash and other assets to pay their bills for six months in the event of a layoff or other shock. Such people are far more likely to eventually fall behind on loans and rein in spending.
Even more troubling: About 25 million low-income households that earn $23,000 or less face growing burdens, with nearly half of that bottom 20% of income earners stressed in 2016, up from 45% in 2013, UBS figures show.
By comparison, the burden for people at higher income levels has been getting lighter. Only 3.6% of households in the top 40% of income earners were stressed in 2016, down from 4.5% in 2013, UBS figures
show, with many enjoying both low mortgage rates and soaring stock prices.
❚ Struggling in San Jose: Mejia, 31, and her three children live in a room in a house for victims of domestic violence for $680 a month. She can’t afford an apartment in San Jose, where the rent, according to Rent Café, averages $2,616. She earns about $300 driving about 40 hours a week for Lyft and another $70 putting in five hours weekly as a manager at McDonald’s.
Mejia, who receives $200 a month in food stamps, says she’s frustrated she can’t get more hours at McDonald’s. “It’s very difficult,” she says, adding that she can’t afford a car or new clothes for her children and has no savings. She has to lease a car from Lyft to drive for the ridehailing service.
The UBS study raises questions about a widely touted economic milestone: that household debt broadly has come down as the economy recovers from the recession of 2007 to 2009. After Americans borrowed heavily during the housing and credit bubbles of the
mid-2000s, many have shaved their debt by living frugally and, in some cases, defaulting.
Total debt is near an all-time low. But Caprio says it is skewed by higher-income households that have benefited from stronger wage growth and low mortgage rates.
❚ Soaring rent: By contrast, many of those on lower rungs of the economic ladder are struggling. One in five working Americans, for example, aren’t saving any income, according to a Bankrate.com survey.
The culprit? Soaring apartment rents combined with tepid pay increases. Average rents jumped nearly 30% nationally since 2010, according to RealPage.
Meanwhile, paychecks have grown just slowly. Average hourly earnings for the bottom tenth on the income ladder have increased 0.5% annually since
2010 on an inflation-adjusted basis, though the pace has picked up since
2015, according to an analysis of Labor Department figures by the Economic Policy Institute.
Layoffs of hundreds of thousands of retail workers have only intensified the pain for low-income households, UBS says. And it’s not just Millennials feeling the financial pressures. About 17% of those in the 55-65 age bracket are stressed, up from 7% in 2001. Many can’t look toward bigger raises for relief because they’re on fixed incomes.
❚ Rising gasoline prices: Thorp, 56, of Payson, Ariz., moved out of her apartment in the Phoenix area about a year ago after the landlord raised the rent for her and her roommate by nearly 8% to
$662. Thorp receives $1,341 a month in Social Security disability insurance, which edges up by much smaller costof-living increases.
She also has grappled with rising gasoline prices in Arizona — up more than 45 cents a gallon, on average, since last year — and an electricity bill that nearly tripled. To cope, she says she cut back on meals, largely eating peanut butter sandwiches. A year ago, her
2005 Mitsubishi Spider was repossessed because she couldn’t keep up with the car payments.
“It took away my independence,” Thorp says, adding that she’s now staying at a friend’s house.
Thorp is far from alone. The share of all households at least 90 days delinquent on auto loans rose from about
3% to 4.1% between 2014 and 2016, UBS figures show. Delinquencies ticked up to about 7% for credit-card payments and remain near all-time highs at about 10% for student loans, according to UBS and the Federal Reserve Bank of New York.
The outlook could brighten if paychecks grow faster.
Caprio says stronger wage growth — which most economists expect this year — is needed to allow stressed households to keep pace with higher rents and an anticipated increase in borrowing costs as the Federal Reserve raises interest rates.
Otherwise, he says, growing delinquencies and loan defaults could eventually prompt some banks to pull back on lending, force many low- and middle-income consumers to reduce spending and dampen earnings of retailers such as Walmart and Dollar Tree.
And don’t expect the recently-passed tax cuts to come to the rescue. Tax reform will net these stressed lowand middle-income Americans an average $26 a month, the study says.