There was some good news and some not so good news in the Fed’s latest annual Report on the Economic Well-Being of U.S. Households.
First the good news.
The report, based on the Board’s fourth annual Survey of Household Economics and Decisionmaking conducted in October 2016, presents a “picture of improving financial well-being among Americans”, at least according to the report (read on to see if this is merited). Overall, 70% of the more than 6,600 respondents said they were either “living comfortably” or “doing okay,” up 1% from 2015 and up 8% from the first survey results in 2013.
Not surprisingly, the highest percentage, or 92%, of those who responded they were “living comfortably” was among the group with more than $100,000 in family income. For Americans making less than $40,000 the breakdown was almost evenly split with 49% saying they are “just getting by.” According to the same study, 28% of respondents said that their income in the last 12 months was less than $25,000, and 40% report that their income was less than the key $40,000 cutoff, which suggests that roughly 4 in 10 Americans are “finding it difficult to get by.”
The improvements in well-being as reported by the survey respondents were concentrated among high-income adults, with at least some college education, and prompted the WSJ to write that “U.S Household financial health improved in recent years.” Even so, most of the changes reported in the survey were relatively modest, “reflecting a slowly improving economy and an unemployment level at or below 5% throughout 2016.”
Now, the not so good news.
Nearly eight years into an economic recovery, nearly half of Americans didn’t have enough cash available to cover a $400 emergency. Specifically, the survey found that, in line with what the Fed had disclosed in previous years, 44% of respondents said they wouldn’t be able to cover an unexpected $400 expense like a car repair or medical bill, or would have to borrow money or sell something to meet it. Troubling as this statistic remains, the overall share of adults who would struggle to come up with $400 in a pinch has declined by 2% from the last survey conducted in 2015, and down 6% since 2013.
Of the group that could not pay in cash, 45% said they would go further in debt and use a credit card to pay off the expense over time. while a quarter would borrow from friends of family, and another 27% just couldn’t pay the expense. Others would turn to selling items or using a payday loan.
The breakdown was largely by education attainment: 79% of those with at least a bachelor’s degree said they would still be able to pay all of their other bills in full if hit with a $400 charge. Just 52% of those with no more than a high school diploma said the same.
Just as concerning were other findings from the study: just under one-fourth of adults, or 23%, are not able to pay all of their current month’s bills in full while 25% reported skipping medical treatments due to cost in the prior year. Additionally, 28% of adults who haven’t retired yet reported to being grossly unprepared, indicating they had no retirement savings or pension whatsoever.
The median out-of-pocket cost for an unexpected, major medical expense was $1,000, and 42% of those with such an expense in the past year either had debt relating to that expense or unpaid balances. The Fed reported that 24 million adults are in debt from medical expenses incurred over the previous year. As a result, many respondents went without some type of care, dental care in particular, because they could not afford it, though the 25% who reported such a situation was down from 27% in 2015.
Commenting on the report’s concerning findings, Fed Governor and Hillary Clinton supporter Lael Brainard said that “the survey findings remind us that many American households are struggling financially, including fully 40 percent of those with a high school diploma or less. More broadly, 44 percent of all respondents could not cover an unexpected $400 emergency expense or would rely on borrowing or selling something to do so. The survey also shows that many adults have no savings for retirement.“
The findings also underscore themes apparent during the presidential election, namely the growing gap between the elites and the broader population. Of whites with a bachelor’s degree or more, 85% said they’re doing OK or living comfortably, compared with 62% for whites with a high-school diploma or less. Blacks and Hispanics have similar but narrower gaps in response to that question when sorted by education.
The biggest differentiator appears to be education: the Fed reported that 82% of adults with a bachelor’s degree or more in education said last year they were “living comfortably” or “doing okay,” up from 80% the year before, as well as 69% of those with some college or an associate degree, up from 66%. Furthermore, 79% of those with at least a bachelor’s degree said they would still be able to pay all of their other bills in full if hit with a $400 charge. Just 52% of those with no more than a high school diploma said the same.
Americans’ sense of economic health also varied among racial and ethnic groups. Of the respondents with no more than a high-school diploma, a greater portion of non-Hispanic whites—20.5%– reported being worse off than a year before than did non-Hispanic blacks, at 18.6%, or Hispanics, at 20.2%.
Asked to comment by the WSJ on the latest annual study, Jonathan Morduch, a New York University professor of public policy and an economist said that “everybody on the low end feels like they’re in a different situation, almost like they’re in a different America than those with a bachelor’s or more.” He added that “The combination of instability and illiquidity are really hurting at the low end,” he added.
That’s the same “end” that had such an outsized impact on the latest presidential election.
So based on the latest set of Fed results presented above, the solution to America’s wealth problem would be to force every American into a college education. Well, sure… just make sure it’s debt free, because as even the NY Fed’s Bill Dudley admitted in early April, student debt and default are a “headwind to economic activity” noting that “rising student loan debt in the United States could ultimately hurt
overall home ownership and consumer spending and erode colleges’ and
universities’ ability to elevate lower-income students.”
There are “potential longer-term negative implications of student debt on homeownership and other types of consumer spending,” Dudley said.
“Continued increases in college costs and debt burdens could inhibit higher education’s ability to serve as an important engine of upward income mobility, (and) these developments are important and deserve increased attention.”
Which is understandable with a record $1.44 trilion in student loans outstanding as of March 31, surpassing even the $1.1 trillion in US auto loans.
Here are the disturbing findings from the latest NY Fed study on America’s student debt crisis:
…our analysis shows that for any given level of educational attainment, those with student debt are less likely to own a home in their early thirties than those who completed their education without taking on as much—or any—debt.
To the extent that the statistical associations we uncovered reflect a causal impact of debt on homeownership, they have important implications for the housing market and future spending behavior.
Homeownership represents an important means of wealth accumulation, with housing equity being the principal form of wealth for most households. So, changes in the way we finance higher education, with an increased reliance on student debt, may have important implications for the housing market and the distribution of wealth.
It only took the Fed about 6 years to figure out what was patently obvious to everyone else. Alas, that does not help solve the core underlying problems discussed above because absent a world in which US colleges hand out diplomas to everyone – which will never happen – the vast wealth gap will only get bigger. And that “prediction” does not even take into account the fact that the US is now about 2 years overdue for a major recession.