It’s no secret that stubborn inflation and aggressive Federal Reserve interest rate hikes have weighed on Americans’ finances for over a year now, but new data from the central bank shows just how many consumers are feeling the pain.
According to the Fed’s 2022 Economic Well-Being of U.S. Households survey released Monday, some 37% of Americans lack enough money to cover a $400 emergency expense, up from 32% in 2021. That means nearly one in four consumers would have to use credit, turn to family, sell assets, or get a loan in order to cover any major unexpected cost. And when asked about non-emergency expenses, 18% of Americans said the largest expense they could cover using only their savings was under $100.
“The 2022 survey found that self-reported financial well-being was among the lowest levels observed since 2016,” the central bank’s researchers wrote of the data, noting that “higher prices have negatively affected most households.”
While a record 35% of Americans said they were doing worse off financially than a year ago in the Fed’s latest household survey, there were also some bright spots due to the low unemployment rate. Despite consistent recession predictions from Wall Street, the U.S. unemployment remained at a 54-year low of 3.4% in April. And the Fed found that one-third of U.S. adults received either a raise or a promotion in 2022 amid the strong labor market.
The only problem is those raises weren’t enough for most Americans to keep up with inflation. Between April 2022 and April 2023, real average hourly wages fell 0.5%, according to the Bureau of Labor Statistics. And the Fed’s latest survey found that “more adults experienced spending increases than income increases” in 2022—44% of Americans spent more, while just 33% made more.
That mismatch in income and spending affected many consumers’ progress toward their retirement savings goals in 2022. Just 31% of non-retirees said their retirement savings plan was on track at the end of last year, a nine-percentage-point drop from 2021, according to the Fed’s data.
The financial burden of high borrowing costs and rising prices is rearing its head in spending this year as well. Claire Tassin, a retail and e-commerce analyst at the decision intelligence company Morning Consult, told Fortune last week that while consumers’ overall spending has remained resilient in 2023, many are avoiding big-ticket discretionary purchases, which is evidence of “inflation’s persistent impact.”
“In an April survey, 85% of Americans said they’re concerned about inflation’s impact on their household finances,” she said, noting that amounts to a six-percentage-point increase since January. “That means shoppers continue to make tough tradeoffs and defer purchases in order to meet their financial obligations.”
Gregory Daco, chief economist at EY-Parthenon, warned in a Monday note that persistent inflation and elevated interest rates are also cooling the labor market and creating a “cautious consumer.” Daco believes the economy could fall on hard times as “vulnerabilities” in Americans’ finances become increasingly evident in this environment (consumer spending accounts for 70% of U.S. GDP). There’s “turbulence ahead,” he wrote. “We continue to anticipate a modest recession.”
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As an economic analyst with a deep understanding of financial trends and macroeconomic indicators, I'm well-versed in the complex interplay of factors that shape the economic landscape. My expertise is grounded in a comprehensive knowledge of economic data, policy implications, and historical context, allowing me to provide insights into the intricate details of the financial challenges faced by Americans today.
The article you provided delves into the 2022 Economic Well-Being of U.S. Households survey released by the Federal Reserve, shedding light on the impact of stubborn inflation and aggressive Federal Reserve interest rate hikes on Americans' finances. The evidence presented in the article reflects a nuanced understanding of economic dynamics. Let's break down the key concepts mentioned:
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Inflation and Interest Rates:
- The article highlights the adverse effects of stubborn inflation and aggressive Federal Reserve interest rate hikes on Americans' finances. Persistent inflation has led to higher prices, negatively impacting the financial well-being of households.
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Emergency Expenses and Financial Strain:
- The survey reveals that 37% of Americans lack enough money to cover a $400 emergency expense, showcasing the financial strain on a significant portion of the population. This is an increase from 32% in the previous year.
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Income and Spending Disparities:
- Despite a low unemployment rate, the article notes that real average hourly wages fell 0.5% between April 2022 and April 2023. More Americans experienced spending increases (44%) than income increases (33%) in 2022, contributing to financial challenges.
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Consumer Spending and Inflation Concerns:
- Consumer spending remains resilient overall, but there is evidence of a cautious approach, with many individuals avoiding big-ticket discretionary purchases. A survey mentioned in the article indicates that 85% of Americans are concerned about inflation's impact on their household finances.
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Labor Market and Economic Outlook:
- The article discusses insights from Gregory Daco, chief economist at EY-Parthenon, who warns that persistent inflation and elevated interest rates are cooling the labor market. Daco anticipates a modest recession as vulnerabilities in Americans' finances become increasingly evident, given that consumer spending accounts for 70% of U.S. GDP.
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Retirement Savings and Financial Planning:
- The data from the Federal Reserve's survey indicates a decline in Americans' progress toward their retirement savings goals, with only 31% of non-retirees stating that their retirement savings plan was on track at the end of the previous year.
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Economic Turbulence Ahead:
- The article concludes with a warning from Gregory Daco about potential turbulence ahead, citing the impact of persistent inflation and elevated interest rates on consumer behavior and the overall economy. Daco suggests the possibility of a modest recession.
In summary, the presented information reflects a comprehensive understanding of the challenges posed by inflation, interest rate hikes, and their cascading effects on various aspects of Americans' financial well-being. The evidence-based analysis in the article aligns with broader economic trends, highlighting the complexity of the current economic environment.
