NY Fed Links Crashing Consumer Sentiment to K-Shaped Economy

Lower-income Americans are facing high levels of economic insecurity and financial strain, according to the Federal Reserve Bank of New York.

These pressures have contributed to consumer sentiment dropping to levels near or below those seen during the Great Recession and the pandemic, New York Fed researchers Gizem Kosar, Ishva Mehta and Wilbert van der Klaauw wrote in a Wednesday (May 27) blog post.

“We find a remarkable increase in food insecurity, particularly among lower-educated and lower-income households and households with young children,” they wrote. “We document a contemporaneous increase in pessimism among the same groups, along with a sharp decline in job-finding expectations.”

The New York Fed’s findings support reports of a “K-shaped economy,” in which there is a growing economic divide between lower-income and higher-income Americans’ spending growth, earnings growth and wealth accumulation, according to the post.

While higher-income Americans have benefited from rising stock prices, near-peak home equity levels and the reductions in mortgage payments secured during the 2020-21 refinance boom, a significant share of middle- and lower-income Americans have been impacted by the high cost of living, persistent inflation and high interest rates, per the post.

Because middle- and lower-income Americans allocate a greater share of their spending to housing, groceriesand utilities, they have experienced higher effective inflation rates.

“While not necessarily causal, the observed positive association between food insecurity and overall consumer pessimism, together with the increase in the incidence of food insecurity, especially among households at the bottom of the K-shape, point to a potential explanation for the unusually low recent levels of consumer sentiment at a time when the hard economic data paint a more positive picture,” the researchers wrote.

The Conference Board said Tuesday (May 26) that its index of consumer confidence dipped 0.7 points in May due to gas prices and worries about war-related inflation.

The University of Michigan’s Surveys of Consumers found that consumer sentiment dropped by 5 points in May and reached the lowest level in the over 73-year history of its Index of Consumer Sentiment. The report attributed the drop to rising gas prices caused by supply disruptions in the Strait of Hormuz.

The November PYMNTS Intelligence report “Income Instability Is Redefining the Paycheck-to-Paycheck Economy” found that 66% of U.S. consumers live paycheck to paycheck.