While the Fed has long been focusing on the revenue part of the household income statement (which unfortunately has not been rising nearly fast enough to stimulate benign inflation in the form of nominal wages rising at the Fed’s preferred clip of 3.5% or higher), one largely ignored aspect of said balance sheet has been the expense side: after all, for any money to be left over and saved, income has to surpass expenses. However, according to a striking new Pew study while household spending has returned to pre-recession levels (the average household spent $36,800 in 2014) incomes have not.
Specifically, while the median income had fallen by 13% from 2004 levels over the next decade, expenditures had increased by nearly 14%. But nobody was more impacted than the one-third of households which the study defines as “low-income.” Pew finds that while all households had less slack in their budgets in 2014 than in 2004, lower-income households went into the red by over $2,300.
In other words, approximately one third of American households were no longer able to cover the core necessities – food, housing and transportation – with average income.
According to Pew, households spent more in 2014 than they did in 1996, after adjusting for inflation; this holds whether the figures are based on averages (means) or medians. The typical household saw its expenditures grow by more than 25 percent, from $29,400 in 1996 to $36,800 in 2014. Mean expenditures grew 27 percent since 1996, rising from $43,200 to $54,800.
The problem is that incomes have not kept up: from 2004 to 2008, median household income grew by only 1.5 percent, while median expenditures increased by about 11 percent. During that period, the expenditure-to-income ratio (the percentage of a household’s budget used for spending) jumped by 9 percent. As the recovery began, median household expenditures returned to pre-crisis levels, but median household income continued to contract. By 2014, median income had fallen by 13 percent from 2004 levels, while expenditures had increased by nearly 14 percent. This change in the expenditure-to-income ratio in the years following the financial crisis is a clear indication of why and how households feel financially strained.
But perhaps worst of all is that typical U.S. households in the center of the income distribution range, aka America’s true middle class, have seen their income after meeting all expenses (aka leftover savings) plunge from $17,000 in real terms a decade ago to a paltry $6,000 as of 2014, a plunge of 65%!
What was the reason for this big drop in residual income and jump in expenses? According to Erin Currier, project director at Pew Charitable Trusts, “over time, [lower-income groups] consistently spend more on transportation and considerably more on housing.”
However, the biggest culprit by far, are soaring rental costs: “Lower income renters are spending nearly half their income on rent, while upper-income groups spend about 15% on rent. The disparity really shows that lower income families don’t have much slack in their budgets for mobility-enhancing investments like savings and wealth building.”
Pew’s conclusion confirms just that.The amount of slack that families had in their budgets declined for all income groups between 2004 and 2014. This means households had less income to devote to wealth-building investments, such as short- and long-term savings, education, and life insurance. In 2004, the typical household in the lower third had a little less than $1,500 left over after accounting for annual outlays. Just 10 years later, this amount had fallen to negative $2,300, a $3,800 decline. These households may have had to use savings, get help from family and friends, or use credit to meet regular annual household expenditures. The typical household in the middle third saw its slack drop from $17,000 in 2004 to $6,000 in 2014. Of note, because income is measured before taxes, some families will have had even less slack in their budgets than this figure implies.
One final note: in the paragraph above replace “slack” with “savings” for an accurate description of what is going on.
Source: Pew Trusts
Full article: Attention President Obama: One Third Of U.S. Households Can No Longer Afford Food, Rent And Transportation (Zero Hedge)