Most Americans saw their budgets cut last year as persistent inflation sapped purchasing power at a time when the Federal Reserve increased borrowing costs and pandemic-era fiscal stimulus largely dried up. .
at the end of In 2022, about 64% of US consumers (166 million people) were living paycheck to paycheck, up from 61% in the same period a year earlier, according to a recent study by digital marketplace bank LendingClub (New York Stock Exchange:LC) and industry publication Pymnts.com which surveyed nearly 4,000 people between December 8-23, 2022.
That means 9.3 million more consumers are living paycheck to paycheck. Even more alarming, 86% of them earned more than $100,000 a year, underscoring the larger scale of the rise in the cost of living. More than half (51%) of that income cohort reported living paycheck to paycheck in December 2022, up from 42% the year before.
Although consumer purchasing power has improved in recent months as headline inflation has eased, disposable income growth continued to undertrend consumer prices at the end of the year, as seen in the chart. FRED chart below.
Anuj Nayar, LendingClub (LC) financial health officer, noted that “while the number of Americans living paycheck to paycheck is close to the height we saw in the midst of the pandemic, the causes appear to be very different, as The economy is not sheltering in place like it was in 2020.”
Looking ahead, a minority of those surveyed expect to see an improvement in their personal finances in 2023, but remain concerned about inflation, the survey showed. As such, 40% of paycheck consumers see their personal finances improve in the coming year, up from 33% in July 2022. Those who don’t live paycheck-to-pay are more concerned about economic uncertainty ( that is, how much higher will interest rates go down and will the Federal Reserve’s tightening cycle drive the US economy into a recession?).
The Fed has been raising its benchmark rate since March 2022, but has implemented smaller and smaller rate hikes in the previous two meetings. Most recently, it raised rates by 25 basis points, shifting lower from the 50bp hike at the December meeting after four consecutive 75bp hikes. Despite the smaller rate hikes, the Fed still signaled a “higher for longer” policy stance due to a still-tight labor market and other lingering inflationary pressures.
In another sign of the bleak economic outlook for consumers, the latest survey from the University of Michigan indicated that consumer confidence, while rising from 2022 lows, remained well below pre-pandemic levels. About two-thirds of consumers anticipated an economic downturn within the next year.
“If the consumer perception that their income will improve this year is shown to be true, it will make it more difficult for the Fed to curb inflationary pressures,” Nayar added. “We can expect more and more Americans of all incomes to identify as living paycheck to paycheck until we see the economy pick up. Now more than ever, it’s crucial that consumers examine their spending and build up savings to prepare for the unexpected.”
Earlier, (February 3), the US unemployment rate hit the lowest mark since 1969 in January as the economy added 517,000 jobs, much more than expected.
