Most Americans experienced budget cuts last year as persistent inflation eroded purchasing power at a time when the Federal Reserve raised borrowing costs and pandemic-era fiscal stimulus was largely exhausted.
In the end In 2022, about 64% of U.S. consumers (166 million people) lived paycheck to paycheck, up from 61% a year ago, according to a recent study by digital marketplace bank LendingClub (NYSE: LC) and industry publication Pymnts.com surveyed nearly 4,000 people between December 8 and December 23, 2022.
This means that 9.3 million more consumers are living paycheck to paycheck. More alarmingly, 86% of them earned more than $100,000 a year, highlighting the increased scale of the cost of living increase. More than half (51%) of that income group said they were living paycheck to paycheck in December 2022, compared to 42% a year earlier.
While consumer purchasing power has improved in recent months with headline inflation easing, disposable income growth continued to underperform year-end consumer price growth, as seen in the FRED chart below.
Anuj Nayar, LendingClub’s (LC) chief financial health officer, noted that “while the number of Americans living paycheck to paycheck is close to the highs we’ve seen amid the pandemic, the causes appear to be very different, as the economy is not in a place like was 2020.”
Looking ahead, a minority of survey respondents expect their personal finances to improve in 2023, but remain concerned about inflation, the survey found. As such, 40% of consumers living paycheck to paycheck see their personal finances improving in the next year, compared to 33% in July 2022. Those who are not living paycheck to paycheck are most concerned about economic uncertainty (ie, how much more interest rates and will the Fed’s tightening cycle push the US economy into recession?).
The Fed has been raising its benchmark rate since March 2022, but has made smaller rate hikes at its two previous meetings. It recently raised rates by 25 basis points, moving from a 50 basis point increase in December’s rally after four consecutive 75 basis point hikes. Despite the smaller rate hikes, the Fed continued to signal a “more dovish” monetary policy stance due to a still-tight labor market and other lingering inflationary pressures.
In another sign of the poor economic outlook for consumers, the latest survey from the University of Michigan found that consumer sentiment, while up from 2022 lows, remained well below pre-pandemic levels. About two-thirds of consumers predict an economic crisis during the next year.
“If consumer perceptions that their incomes will improve this year turn out to be true, it will offset the effects of the Fed to curb inflationary pressures,” Nayar added. “We can expect more and more Americans of all incomes to identify themselves as living paycheck to paycheck until we see the economy recover. Now, more than ever, it’s critical that consumers examine their spending and build savings to prepared for the unexpected.”
Earlier (February 3) the US unemployment rate hit its lowest level since 1969 in January as the economy added 517,000 jobs, much more than expected.