Despite an improving economy that should be easing the financial struggles of all Americans, a growing numberof low- and middle-income households areplagued byhigh debt and have little or no savings.
The financial strains have especially worsened for those near the bottom of the income ladder.
While wagesfor low- and middle-income Americans arerising, they're not keeping up with higher costs, like rent and utilities. That means these households aren't riding the hopeful trends lifting many families:unemployment tumblingto 4.1% today from 10% in 2009;debt levelsclose to record lows; climbing consumer confidence and spending.
They are people like Alejandra Mejia of San Jose, Calif., whose paycheck can't cover higher housing costs. Or Dawn Thorp, in Phoenix, whose disability payments don'toffset higher gasoline prices, electric bills or rent.
According to aUBS study, such households could fall behind on loan payments, reduce their spending and slow or even undercut a U.S. economy that seems to be firing on all cylinders for the first time since the Great Recession ended in 2009.
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“You have a large share of the population who are struggling to meet their financial obligations and has seen modest to no improvement,” says UBS Credit Strategist Stephen Caprio.
'STRESSED'
About 76 million U.S. households make up the bottom 60% of income earners, with take-home pay of $65,000 or less. Of that group, about a third were "stressed" in 2016, UBS says, near the highest level since the mid-1990s.UBS defines 'stressed' Americans as those whose financial obligations —such as mortgages, rent, auto loans and leases, and credit card bills —exceed 30% of their income and who don’t have enough cash and other assets to pay their bills for six months in the event of a layoff or other shock. Such people are far more likely to eventually fall behind on loans and rein in spending.
Even more troubling: About 25 million low-income households that earn $23,000 or less face growing burdens, with nearly half of that bottom 20% of income earners stressed in 2016, up from 45% in 2013, UBS figures show.
By comparison, the burden for people at higher income levels has been getting lighter. Only 3.6% of households in the top 40% of income earners were stressed in 2016, down from 4.5% in 2013, UBS figures show, with many enjoying both low mortgage rates and soaring stock prices.
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STRUGGLING IN SAN JOSE
Mejia, 31, and her three children live in a room in a house for victims of domestic violence for $680 a month. Shecan’t afford an apartment in San Jose, Calif., where the rent, according to Rent Café, averages $2,616. She earns about $300 driving about 40 hours a week for Lyft and another $70 putting in five hours weekly as a manager at McDonald’s.
Mejia, who receives $200 a month in food stamps, says she’s frustrated she can’t get more hours at McDonald’s. “It’s very difficult,” she says, adding that she can’t afford a car or new clothes for her children and has no savings. She has to leasea car from Lyft to drivefor the ride-hailing service.
The UBS studyraises questions about a widely touted economic milestone: thathousehold debt broadly hascome down as the economy recovers from the recession of 2007-09.After Americans borrowed heavily duringthe housing and credit bubbles of the mid-2000s, many haveshaved their debtby living frugallyand, in some cases, defaulting.
For every $100 of income, U.S. households in total owe about $10 onmortgages, auto and student loans, and credit card debt, according to UBS and the Federal Reserve. That debt figure is near an all-time low.But Caprio says it isskewed by higher-income households that have benefited from stronger wage growth and low mortgage rates.
SOARING RENT
By contrast, many of those on lower rungs of the economic ladder are struggling.One in five workingAmericans, for example, aren't saving any income, according to a Bankrate.com survey. And 44% of households couldn't cover anunexpected $400 emergency expense without borrowing or sellingsomething, according to a Federal Reserve survey last year.
Nearly half of middle-income workers worry about their financial situation at least once a week, and 23% of those who earn less than $45,000 worry about money every day according to a Massachusetts Mutual Life Insurance study.
The culprit? Soaring apartment rents combined with tepid pay increases.
Average rents jumped nearly 30% nationally since 2010, according to RealPage. A sign of how pricey rents are: about 8% of Millennials who aren’t students receive help from their parents with rent, an Apartment List survey says.
Meanwhile, paychecks have grown just slowly. Average hourly earnings for the bottom tenth on the income ladder have increased 0.5% annually since 2010 on an inflation adjusted basis, though the pace has picked up since 2015, according to an analysis of Labor Department figures by the Economic Policy Institute.
Chain and department store closures and the related layoffs of hundreds of thousands of retail workers have only intensified the pain for low-income households, UBS says.
And it's not just Millennials feeling the financial pressures. About 17% of those in the 55-65 age bracket are stressed, up from 7% in 2001. Many can't look toward bigger raises for relief because they're on fixed incomes.
RISING GASOLINE
Thorp, 56, of Payson, Ariz., moved out of her apartment in the Phoenix area about a year ago after the landlord raised the rent for her and her roommate by nearly 8% to $662. Thorp receives $1,341 a month in Social Security disability insurance, which edges up by much smaller cost-of-living increases.
She also has grappled with rising gasoline prices in Arizona — up over 45cents a gallon, on average,since last year— and an electricity bill that nearly tripled. To cope, she says she cut back on meals, largely eating peanut butter sandwiches. A year ago, her 2005 Mitsubishi Spider was repossessed because she couldn’t keep up with the car payments.
“It took away my independence,” Thorp says, adding that she’s now staying at a friend’s house.
Thorp is far from alone. The share of all households at least 90 days delinquent on auto loans rose from about 3% to 4.1% between 2014and 2016, UBS figures show. Delinquencies ticked up to about 7% for credit card payments and remain high near all-time highs atabout 10%for student loans, according to UBS and the Federal Reserve Bank of New York.
LATE ON MOBILE-HOME LOANS
Low-income households have been disproportionately affected. Five percent of Americans with mobile home loans were at least 30 days delinquent last fall, up from 2.9% a year earlier, even as single-family home mortgage delinquencies have steadily fallen.
And 68%of financial executives surveyed by UBS last fall expect delinquencies to rise over the next 12 months, up from 37% last spring.
The outlook could brighten if paychecks grow faster.
Caprio says stronger wage growth —which most economists expect this year —is needed to allow stressed households to keep pace with higher rents and an anticipated increase in borrowing costs as the Federal Reserve raises interest rates.
Otherwise, he says, growing delinquencies and loan defaults eventually could prompt some banks to pull back on lending, forcemany low- and middle-income consumers to reduce spending and dampenthe earnings of retailers such as Walmart and Dollar Tree.
And don't expect the recently-passed tax cuts to come to the rescue. The tax reformwill net these stressed low- and middle-income Americans an average $26 a month, the study says.
