A recent CBS News poll revealed that many Americans are feeling pessimistic about the economy and their financial prospects. Over half of the respondents admitted to struggling to pay their bills. This gloomy outlook can be attributed to several factors. Inflation has significantly impacted people's paychecks, while Census data shows a decline in median household incomes in one-third of U.S. states. Interestingly, many of these states are located in the Midwest and Northeast, including key swing states like Michigan, Ohio, and Pennsylvania. The U.S. Census Bureau's data also indicates that household incomes remained stagnant in 29 states and only improved in five states.
These state-level statistics shed light on why Americans have become disillusioned with the economy, despite its overall strength, as reflected by a low unemployment rate. While the labor market has experienced a robust recovery following the pandemic, individuals' primary experience of the economy – their earnings – has not followed suit. In fact, median household income in the U.S. has fallen by 2.3% for three consecutive years, reaching $74,580 last year. Additionally, households are contending with high inflation and the cessation of pandemic-era benefits, such as federal stimulus checks and the expanded Child Tax Credit, which provided extra financial support. Although inflation has started to subside, it remains elevated, contributing to the persistently low consumer sentiment.
Jesse Wheeler, a senior economist at Morning Consult, believes that a long-term impact of inflation, concerns about a potential recession, and stock market volatility have contributed to this pessimism. He emphasizes that it takes time for consumers to regain confidence in the economy, even if it has improved since the initial lockdowns of the pandemic. Slumping household incomes in the Midwest and Northeast can be attributed to a combination of factors including the erosion of purchasing power due to inflation, the job mix within these states, and demographic factors.
One vulnerable group particularly affected by inflation is senior citizens, who live on fixed incomes. While the Social Security Administration adjusts benefits annually to account for inflation, critics argue that the cost-of-living adjustment fails to keep pace with rising prices. Consequently, the poverty rate for individuals over 65 surged to 14.1% in 2022, increasing by more than three percentage points from the previous year. Many states experiencing a decline in incomes have a higher percentage of older residents compared to the national average. For example, New Hampshire, which experienced the sharpest drop in median household income, has around 20% of its population aged over 65, compared to the national average of approximately 17%.
Morning Consult's daily Index of Consumer Sentiment reaffirms the overall negative sentiment among consumers. While it doesn't directly correspond with the median household income data, there are some similarities at the state level. Consumer confidence notably declined in the Midwest from 2021 to 2022. Conversely, a few states with increases in real median incomes, such as Delaware, Alabama, Alaska, and Utah, experienced relatively small declines in consumer confidence. Interestingly, Alaska was the only state where consumer sentiment increased, coinciding with its significant gain in household income.
There is hope for improved household incomes in 2023, as wage gains have finally surpassed inflation. However, Jesse Wheeler cautions that higher interest rates, which increase debt costs, and the resumption of student debt repayments could strain budgets for many individuals.