U.S. Financial Stress Falls to an All-time Low Amid Rising Incomes
Americans’ stress over their personal finances plunged to a record low in August, reflecting improved income and job prospects amid a booming labor market. The Investor's Business Daily/TIPP Financial-Related Stress Index declined by 4.2 points (5.1 percent) this month to a reading of 47.4, the lowest in the nearly 11-year history of the measure. August marks the second time this year that financial stress levels have reached an all-time low, with the previous instance occurring inMay, when the Index dropped to 49.9. Further, our stress indicator has fallen 13% over the past year, as more Americans begin to feel in their own lives the effects of a resurging economy, particularly in the form of higher wages.
TechnoMetrica developed the monthly IBD/TIPP Financial-Related Stress Index in order to measure the levels of stress that Americans have displayed in regards to their personal finances. An Index reading above 50 indicates more stress, while an Index reading below 50 indicates less stress.
Financial stress levels should remain low in the months ahead, as all three of the Index’s moving averages fell in August, with the longer-term 12-month average recording its sixth straight monthly decline. In addition, the all-time average in the measure edged lower for the second month in a row, a further indication of growing momentum in financial confidence.
Money stress waned across demographic groups this month, as all 21 segments that TechnoMetrica monitors on a monthly basis showed improvement in the Index. Furthermore, a majority (13) of groups recorded stress levels in positive territory (below 50), up from eight in July, suggesting that financial security is becoming increasingly widespread. Consumers residing in the Northeast (minus 8.4 points) showed the greatest easing in financial stress this month, posting their lowest Index reading on record. The diminished anxiety over finances among Northeasterners has likely been driven by higher wages and healthy job growth in the region. For instance, the unemployment rate in the Northeast fell nearly 20 percent between May 2017 and May 2018. Further, according to a recent report on labor market trends from the ADP Research Institute, wage growth in the Northeast outpaced every other region in the U.S. over the past year.
Financial worry also ebbed significantly among African Americans and Hispanics (minus 5.8), with the segment recording its lowest levels of stress since January. Both groups have seen their unemployment rates hit all-time lows in recent months.
Meanwhile, women are reporting their lowest levels of financial stress in the study’s history, as the gender group displayed a 5.6-point positive change in the Index this month. The employment situation among women has brightened in recent years. Female employment is closing in on its record high set in March 2000, according to government data. In addition, unemployment among women fell to its lowest level since 1953 in June.
Stress over personal finances has also eased markedly among the 25 to 44 and 45 to 64 age cohorts, each of which exhibited a 5.2-point improvement in the measure. The lessening in financial worry among consumers aged 25 to 44 reflects the steady rise in the number of prime working age Americans that are re-entering the workforce after being sidelined for much of the economic recovery. In July, the share of 25 and54 year olds with jobs reached its highest level since 2008, at 79.4, according to the St. Louis Federal Reserve. However, employment has grown even more rapidly among older workers, as the Federal Reserve has found that all net job growth between 2000 and 2017 was among those aged 55 and older.
Political preference remains a key determinant factor of an individual’s sense of financial security. Republicans continue to report the lowest levels of financial stress of any demographic group, reflecting their view that President Trump’s economic policies, such as his efforts at deregulation, have helpedjump start the economy and boost job creation. A recent report from the American Action Forum has found that, by the end of the year, the administration will far exceed its goal of cutting two regulations for every new regulatory action. Through July, government agencies have taken a combined 47 deregulatory actions, while creating only 10 new regulations. Meanwhile, Democrats, who are overwhelmingly opposed to the president and his policies, maintain the most pessimistic outlook towards their financial circumstances.
At the same time, financial anxiety has plummeted among those who are not endeared to a major political party. Independents, a crucial block of voters, recorded their lowest levels of stress in the history of the Index, displaying a 5.6-point (12%) improvement in the measure this month.
The precipitous drop in overall financial stress levels has largely been driven by growing confidence in a labor market that continues to create jobs at a robust pace. Encouraged by a roaring economy and greater employment opportunities, consumers who had previously given up looking for a job are rushing back into the workforce. In July, the overall employment-population ratio, the government’s indicator of the share of Americans with a job, reached its highest level since January 2009, at 60.5, an increase of 0.3 p.p. over the year.
In addition, businesses are hiring at a consistently solid rate. So far this year, job growth in the U.S. has averaged around 215,000 new payrolls per month, higher than in both 2017 and 2016. Blue-collar jobs have seen a particular boom over the past year. For instance, the economy has created 327,000 new manufacturing jobs in the past year, the largest increase since 1995. Additionally, the construction industry has added 308,000 new payrolls since last year, bringing the total to 7.2 million jobs, the most in a decade.
Meanwhile, the unemployment rate remains near an 18-year low, as the labor market edges closer to full employment. Further, jobless claims fell to their lowest level since December 1969 in mid-July, to 208,000.
A steady rise in incomes is also buoying consumers’ sentiment towards their financial situations. In the midst of a tightening labor market, employers have been compelled to lift wages in order to compete for skilled workers. According to the Labor Department, workers’ pay rose at an annual rate of 2.8 percent in the second quarter, the largest gain since the third quarter of 2008. Wage growth has been particularly strong among lower-paying roles. In addition, Sentier Research found that median household income rose in April to its highest level in nearly two decades, at $61,483.
Thus, a strengthening labor market, coupled with various benefits from the new tax cuts, has put more money in the pockets of U.S. consumers, boosting their purchasing power. While real disposable personal income grew at a rate of 1.6 percent in 2016, growth had improved to 2.8 percent in2017, and hit 3.5 percent in the first half of this year.
It is not surprising, therefore, that consumer spending helped propel GDP growth to its best performance in four years recently. According to government data, the economy grew at a 4.1-percent rate during the second quarter (April to June), the largest gain since the third quarter of 2014. The data also showed that spending among Americans surged 4.0 percent, compared to just 0.5 percent in the first quarter of 2018.
TechnoMetrica uses a monthly Random Digit Dial (RDD) telephone survey to collect the survey data, with a sample size of approximately 900 respondents. The margin of error is +/- 3.3 percentage points.
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