At the end of 2022, consumers and economists alike worried whether the new year would bring an economic downturn, or rising inflation that would impact households already feeling the pinch from the increased costs of necessities like food, gas, and shelter.
Now into the beginning of 2023, things appear more uncertain. Inflation has eased from its peak but remains stubbornly above the Federal Reserve’s target for price stability. Meanwhile, consumers are continuing to draw down balances that previously rose from government supports and a temporary slowdown in spending. Yet, consumers still report feeling uneasy about the state of the economy.
So why the mismatch between the current economic reality, and the average American’s perception of it?
Recent research from the JPMorgan Chase Institute, which looked at trends in household purchasing power from 2019 through the height of the pandemic until 2022, found that, although only marginal, households actually had higher incomes in 2022 compared to 2019, even when adjusted for increased prices. While consumers are somewhat better off than they were before, when considered within the context of time and inflation, the gains are small and most lower-income households are actually barely breaking even.
Some of these higher incomes could be attributed to gains from the federal stimulus programs during the pandemic, such as temporary supplements to Unemployment Insurance, Economic Impact Payments, and Advanced Child Tax Credit payments. Stimulus programs were critical to helping people across all income brackets, here in Connecticut and across the country, navigate and survive the pandemic. But for those in the lower income brackets, these programs have played a critical role in boosting their balances.
According to the Institute, people in the lowest income quartile saw income growth rise to 30% above 2019 levels at the time of these programs, double the growth experienced by those in the highest income quartile. While these programs provided a financial cushion for families during and after the height of pandemic shutdowns, their effects have not been permanent. As the fiscal stimulus faded in late 2021 and price increases accelerated, inflation-adjusted incomes fell.
When looking at how purchasing power changed for households of color, the Institute found similar levels of growth, followed by deterioration.
The income growth households experienced allowed them to weather an unexpected period of economic shocks. However, rising prices and the end of stimulus programs have eaten into their savings, leaving them barely better off than when the pandemic started.
Households relied on these accumulated savings to bear the brunt of rising prices, and the end of these programs has resulted in take-home incomes dropping. As household balances have returned to average levels, families face the possibility that developments they were working towards –such as improving their savings or paying off debt – could unwind as prices rise.
So while households purchasing power has gone up since the pandemic, and consumer spending is still strong, households incomes have dropped fallen from their peak levels. This will impact the decisions households make in the coming months, especially lower-income households which spend a greater percentage of their income on basic needs.
However, the outlook is not necessarily bleak for families. Despite facing a period of economic uncertainty, overall, consumers are in decent shape to weather it, especially compared to historic norms.
