T his section presents a picture of the overall financial status of consumers today in terms of income, spending, debts, and wealth. It is based on data from the Consumer Expenditure Survey, the Survey of Consumer Finances and other national data sources. These sources reveal that since 2000, American families have faced declining real incomes because of high unemployment and stagnant wages, as well as a higher cost of living that has led to greater debt levels and declining assets and wealth.
T his section presents a picture of the overall financial status of consumers today in terms of income, spending, debts, and wealth. It is based on data from the Consumer Expenditure Survey, the Survey of Consumer Finances and other national data sources. These sources reveal that since 2000, American families have faced declining real incomes because of high unemployment and stagnant wages, as well as a higher cost of living that has led to greater debt levels and declining assets and wealth.
Over the past decade, American families have struggled to resist losing economic ground, a situation exacerbated by the deep recession and slow recovery. Many families have experienced a precipitous loss of wealth because of the housing crash, which was sparked by high-risk subprime mortgages. Others have been targeted by lenders and brokers offering high-cost, often deceptive loan products, that leave them worse off. In many cases these borrowers could have qualified for better, more affordable products. High unemployment and underemployment, stagnant wages for the employed, increasing non-discretionary expenses, and limited access to responsible credit have also contributed to significant losses for the typical household. The result is a loss of wealth by households of all races and unprecedented wealth disparities between white households and African-American or Hispanic households (Kochhar, Fry, & Taylor, 2011). All of this comes at a time when the American worker has delivered consistently increasing productivity with little increase in compensation to show for it (Fleck, Glaser, & Sprague, 2011).
The impact of these economic circumstances has been devastating for the typical American household. The most recent available data from the Consumer Expenditure Survey and the Survey of Consumer Finances show that the typical American household has very little economic breathing room (Table 1). After households pay for housing, utilities, food, health care, debt payments (not including mortgage or auto payments), and other expenses, the typical U.S. family has just $100 left each month. This is enough, perhaps, to meet their expected monthly obligations, but not nearly enough to manage a major unexpected expense or to save for college, retirement, or a down payment for a home purchase.
The stagnant finances of American households are no surprise given the dismal performance of the U.S. economy since the middle of the last decade. Figure 1 shows the gross domestic product (GDP), the most commonly-used summary metric of U.S. economic health, from 1970 to 2011 in real (inflation-adjusted) dollars and nominal (non-inflation-adjusted) dollars. The flat real GDP growth and slow nominal growth since 2005 stands out from the trend of generally increasing GDP of the last 40 years. The 16.5% real growth between 2000 and 2010 is less than half the growth rate in each of the prior three decades. The decline in real and nominal GDP from 2007 to 2009 represented the first nominal decline in GDP in 60 years and the largest real decline since the Bureau of Economic Analysis began keeping statistics in 1929.
The primary cause of the decline in U.S. GDP was a decrease in consumer expenditures on goods and services, which accounts for about 70% of total U.S. economic activity (Bureau of Economic Analysis, 2012). The economic growth in the decades preceding and years following the recession of 2007–2009 was largely driven by increases in household consumption of goods and services. In order for the U.S. economy to grow again, individual households must find themselves in a position to increase their spending. This will be difficult as long as households continue to face stagnant incomes, increasing expenses, increasing levels of debt, and declining net worth.
Stagnant and Declining Incomes The typical American family relies on the wages of one or two workers to pay rent, buy food and clothing, commute to and from work, pay for routine and emergency medical care, and otherwise meet their basic needs. Those who can afford to do so also use their wages to build wealth through home ownership, save for retirement, or send their children to college. Having incomes that keep pace with the rising costs of these basic and aspirational needs is essential to the future economic health of the American family. Though vital to Americans’ current and future well–being, income growth (or even stability) has not occurred during the last decade. Although the typical household did bring in more nominal income in 2010 relative to 2000 (see Figure 2), all of the income growth was in the years leading up to the recession of 2007 to 2009. Nominal incomes declined throughout the years of the recession and continued to decline as the decade concluded.
Moreover, nominal income growth paints too rosy a picture of income trends. When controlling for inflation (see Figure 3), the typical household really had less annual income at the end of the decade than it did at the beginning. What looked like income “growth” using nominal income at the beginning of the decade was actually a period of stagnant income and ultimately declining income at the end of the decade, when looking at real wages. And though workers made less as the decade progressed, their productivity increased by 20% (Jank & Owens, 2012). Workers appear to be benefitting less from productivity gains than in prior periods.
Declines in income were particularly pronounced for African-American and Hispanic families. One reason for this is the disproportionate impact of job losses on African-American and Hispanic workers. While overall job gains from 2000 to 2007 were erased by the recession, African-American workers lost more than twice the number of jobs between 2007 and 2011 that they gained during the pre-recession part of the decade (see Figure 4). Industries upon which many African-American and Hispanic workers have relied for well-paying, stable employment—namely, manufacturing and construction—suffered job losses of 10% and 20%, respectively. And although the losses in construction followed a boom in the earlier part of the decade, job losses in manufacturing began well before the recession.
Unemployment reached historic levels for workers of all ages during the recession, but changes in the level of participation in the labor market varied dramatically by age. Participation by workers 16–24 declined throughout the decade, and those declines accelerated during the recession. In contrast, participation by adults over 55 increased through all but the last years of the recession. Declines in retirement resources and lost wealth possibly kept older workers in the labor force longer than earlier cohorts of older workers (BLS, 2010).
This longer-than-expected labor participation among older adults, combined with job losses across several sectors, helps to explain the higher unemployment and declining labor participation of younger workers. Increasing Cost of Living The declining real incomes of the last decade would not have been so hard on families if the cost of maintaining a household had also remained unchanged. While families would not have had resources to improve their standard of living, they would have at least been able to consume at the same level year after year. Instead, families were faced with increases in basic non-discretionary expenses like food, housing, transportation, medical care, and utilities (Figure 5) with no growth—or sometimes even decreases—in income to pay for these items.
