At a Glance
– Middle- and low-income families are facing a sharp decline in disposable cash.
– The disparity in financial recovery post-pandemic risks long-term economic growth.
– Urgent policy measures are needed to address income inequality and financial resilience.
Financial Crunch: The Decline in Disposable Income
A recent report by the San Francisco Federal Reserve (Fed) has revealed an alarming situation for middle- and low-income Americans: a significant decline in disposable cash, which has dropped below pre-pandemic levels. The growing expense of daily living and stagnant wage growth are the primary culprits, further straining household budgets and limiting economic mobility.
Disparities in Wealth Accumulation
During the pandemic, the top 20% of households saw a substantial increase in their liquid assets, which eventually returned to levels just 2% below pre-pandemic expectations. Conversely, the bottom 80% of households experienced a less significant rise in savings, and their excess funds were quickly depleted, leaving their liquid assets about 13% lower than anticipated before the pandemic hit.
The Impact on Economic Stability
The San Francisco Fed report emphasizes a troubling trend: smaller financial cushions and rising credit stress among middle- and low-income families, which threaten to stymie consumer spending. Since consumer expenditure comprises approximately two-thirds of the U.S. economic output, this reduction in spending poses substantial risks for economic stability and growth.
Rising Delinquencies: A Red Flag
Notably, credit card delinquencies among these income brackets have surged at a faster rate and hit higher levels than those of higher-income families. This increase indicates a growing financial strain and an inability to manage debts effectively.
“That development comes as credit card delinquencies among middle- and low-income families rose earlier, faster and to “notably higher” rates than those of high-income families, the research found.” – Eric Revell
Effects of Aggressive Rate Hikes
Despite robust consumer spending and a resilient labor market during the Federal Reserve’s aggressive interest rate hikes in 2022-23, recent economic data suggest that the policy may be overly slowing the economy. The unemployment rate has climbed to 4.3%, the highest post-pandemic level, while hiring pace has decelerated, raising concerns among policymakers.
Policy Measures: A Call for Action
With the Fed’s benchmark federal funds rate at a considerable 5.25% to 5.50%, any further delay in addressing this economic imbalance could lead to a prolonged financial crunch. Federal Reserve Chair Jerome Powell has suggested that interest rates might be cut as soon as September if inflation trends back to the 2% target.
The Pandemic Savings Phenomenon
Interestingly, U.S. households managed to accumulate unprecedented savings during the pandemic due to a strong fiscal response and reduced consumer spending. These savings, which peaked around $2.1 trillion in August 2021, have been drawn down significantly to about $500 billion by March 2023. Even with this drawdown, a substantial stock of excess savings remains, which could support consumer spending into Q4 2023 and possibly into 2024.
“We show that households rapidly accumulated unprecedented levels of excess savings—defined as the difference between actual savings and the pre-recession trend—relative to previous recessions.”
What’s Next? A Glimpse Ahead
The latter part of 2023 will be a critical period for American families and the broader economy. While the aggregate stock of savings might support consumer spending for the foreseeable future, relying solely on this cushion is not a sustainable solution. It’s imperative to introduce targeted policy measures aimed at enhancing financial resilience and addressing the root causes of income inequality.
As we await further actions from policymakers, the hope remains that the ongoing analyses and proposed solutions can mitigate these economic disparities and forge a path toward stability.
Middle- and low-income Americans are running dangerously low on disposable cash, and without immediate and effective policy measures, the repercussions could be far-reaching, affecting not only individual households but the entire United States economy.
Sources
1. Middle- and low-income Americans running out of disposable cash: SF Fed
2. The Rise and Fall of Pandemic Excess Savings
