Despite a robust economy and low unemployment rates, middle- and low-income Americans are experiencing heightened financial stress due to persistent inflation. Recent data revealed a decline in the consumer sentiment index in June, marking a seven-month low, primarily driven by increased anxiety among these income groups.
The disparity in economic perceptions between wealthier Americans and those with lesser means is becoming more pronounced. Wealthier households benefit from substantial financial buffers and gains in the surging stock market, enhancing their overall financial security. Conversely, many lower-income households have depleted their pandemic-era savings and now rely solely on their earnings to cope with rising prices.
Economists highlight that sustained high inflation and interest rates are exacerbating budgetary pressures on these households. Increased credit card usage and a rise in loan defaults, particularly auto loans, are evident signs of this strain.
A notable increase in incomes over the past several years has provided some relief. A tight labor market has driven up wages, and many individuals who switched jobs received significant raises. According to a recent Congressional Budget Office (CBO) report, incomes have slightly outpaced inflation since 2019, leading most families to spend a marginally smaller portion of their income on essentials.
However, this income growth has not been uniform. The CBO reports that while the highest earners reduced their spending on goods and services by 6.3% between 2019 and 2023, the lowest earners only managed a 2% reduction. This disparity sheds light on why wealthier individuals are less concerned about inflation compared to lower-income groups.
Furthermore, the CBO found that lower-income households have faced steeper price increases for the goods and services they frequently purchase, and their wages have not risen proportionately.
The growing economic pessimism among many Americans poses potential risks to the broader economy. Nationwide financial market economist Oren Klachin emphasizes that middle- and lower-income individuals primarily spend their earnings on consumer goods and services. A significant reduction in their spending could disrupt economic momentum.
“This will be an important dynamic to watch in the second half of this year,” Klachin noted.
As economic challenges persist, monitoring the financial behavior of lower-income households will be crucial in assessing the overall health and trajectory of the economy.
Key Takeaways:
- Consumer Sentiment Decline: June saw a significant drop in the consumer sentiment index, influenced mainly by middle- and lower-income Americans’ concerns.
- Economic Disparity: Wealthier households benefit from financial cushions and stock market gains, while lower-income Americans have exhausted pandemic savings and face rising prices.
- Income and Spending: Although incomes have grown, not all groups have benefited equally, with the highest earners reducing their spending more than the lowest earners.
- Inflation Impact: Lower-income households have experienced higher price increases and slower wage growth, exacerbating economic stress.
- Economic Implications: Reduced spending by lower-income groups could pose risks to economic stability, highlighting the need to monitor this dynamic closely.
