Fed’s Economic Well-Being Report Understates Struggles of Paycheck-to-Paycheck Consumers

The Federal Reserve Board’s latest report on the pressures faced by U.S. households paints a picture where a record number of consumers say they are worse off than they were a year ago.

And the data may not reflect how bad things really are, especially for paycheck-to-paycheck consumers.

The headline findings of the Fed, in the report “Economic Well-Being of U.S. Households,” report more than a third of households — at 35% —contended they were worse off in 2022 than a year ago, the highest level since 2014, when that question first had been posed by the central bank in the survey. That tally was 20% in 2021.

A full 54% of adults queried said that budgets had been affected “a lot” by inflation. Drill down a bit, and the data shows that the impact has been most keenly felt by households making less than $100,000, as 64% of respondents noted that impact if they made between $25,000 to $50,000, and 60% of those below that threshold said the same.

Even high earners cannot escape the ravages of inflation, as 41% earning more than $100,000 said household budgets had been impacted significantly by price increases. The read across here is the higher prices pressure paychecks and pressured paychecks stretch only so far when covering monthly expenses.

In these respects, the Fed’s data dovetails with PYMNTS’ own findings. In the latest edition of the “New Reality Check,” which find that a majority of consumers earning less than $100,000, 65% of those earning between $50,000 to $100,000 reported living paycheck to paycheck, and 48% of those earning more than $100,000 said the same.

All told, 60% of U.S. consumers live paycheck to paycheck.

The Fed found, too, that in response to inflation, two-thirds of consumers used fewer, or stopped using, a variety of products in response to inflation. Nearly two-thirds switched to cheaper products. More than half reduced their savings. PYMNTS has found that roughly 69% of individuals have pared back spending on retail items, with slightly lower percentages for grocery items.

Emergency Expenses: An Achille’s Heel?

But it’s in the details and the data governing emergency expenses that hint that the Fed may be underestimating financial vulnerabilities. The share of adults who reported that they would cover a $400 emergency expense using cash or its equivalent was 63%, per the Fed data, off 5% year on year. A full 13% said they could not cover that expense at all. The Fed stated that if only using savings, 18% said the “largest expense” they’d be able to cover was less than $100, with an additional 14% stating the limit was up to $499. As many as 46% said they could handle a $2,000 expense (or above) using only savings.

But.

PYMNTS data have shown that the average emergency expense comes in at $1,400, which pushes the reality of financial shocks far higher than the $400 hypothetical given by the Fed — the real number is closer to $1,400 — and dangerously close to eating away at the cash cushions that relatively well-cushioned consumers might have (that $2,000 expense noted above).

Couple that with the fact that 12% of us spent more than we earned in the past 12 months, and 27% of us have used savings to pay down credit card debt, and the ability to handle life’s curve balls with the aid of ready funds becomes precarious.

Credit’s no sure salve here: Separate research from PYMNTS and Sezzle finds that 69% of consumers are “credit secure” and can access new lines of credit.

But 41% of them said that financially harmful life events had hit their credit scores, and 26% said they’d missed payments. Moreover, 16% of credit-secure consumers noted that these life events led to them having trouble getting new lines of credit.