Every three years, the Federal Reserve’s Survey of Consumer Finances interviews thousands of American families (6,026 for the newly published 2013 edition) about their income, savings, investments and debts. It is some of the richest information available about Americans’ financial lives, particularly in the 2010-13 recovery from the 2007-09 Great Recession.
The results are quite sobering.
No recovery in incomes for most groups
The most basic measure of financial well-being is how much money people make and how much that money can buy. Many measures, such as per capita personal income, have risen in recent years, even after adjusting for inflation. But the Fed’s survey provides a more detailed insight into how incomes of people in different groups were affected. It is fairly depressing. Incomes rose in the 2010-13 time frame for the top 10% of earners (defined as a 2013 median income of $230,000). They rose only slightly, by 0.7%, for the 80th to 90th percentile of earners (median income of $122,000). But real incomes fell for every other group of earners.
According to a New York Times review of the Fed data, the simplest yet most important fact to understand about the current economic recovery is that it has not resulted in higher incomes for anyone other than those who were already doing well. And very large groups of Americans have experienced falling incomes.
The survey’s breakdown of sources of household income explains why this is the case.
Wages have fallen as a proportion of income
Most Americans, particularly those in the middle- and lower-income brackets, generate most of their income from wages and salaries, rather from investment income like interest, dividends and capital gains. This contrasts with the wealthiest 25% of households, for which less than half (47%) of income comes from wages, compared with 70-80% for the lower three brackets.
Wealth has been stagnant despite the markets’ recovery
While household income matters, so does wealth. And with respect to household wealth, it may seem reasonable to assume that everyone was better off in 2013 than they were in 2010, as the housing and stock market both experienced strong recoveries.
However, the gains in the stock market did not translate into greater wealth for most American families. The median American household was worth $81,200 in 2013, down from $82,800 in 2010 and way down from the $135,400 of 2007 (all figures are inflation-adjusted, using 2013 dollars).
From the data, it appears that the 2008-09 stock market sell-off led many Americans – especially middle-income Americans – to abandon investing in stocks. Among people in the middle 20% of the income distribution, only 9% owned stocks in 2013, down from 14% in 2007. Participation in retirement accounts – the most common vehicle for long-term savings – also declined; only 51% of middle-income families had a 401(k) or similar account in 2013, down from 56% in 2007.
Among all Americans, the proportion owning stocks in some form, either directly or indirectly (via mutual funds or retirement accounts) has fallen from 53% before the crisis in 2007 to 49% in 2013. The financial crisis appears to have scared Americans, especially middle-income Americans, away from financial investments, which means they have benefited less from the recovery than they otherwise would have.
Progress reducing household debt
The Fed survey does include one positive trend – major progress in reducing the amount of debt owed by American households, as well as how much they must pay to service that debt, expressed as a percentage of their income.
Among middle-income families, the proportion with mortgage debt on their primary residences fell from just over 50% in 2007 to under 40% in 2013. Of those in that income bracket who had a home mortgage, the median mortgage balance fell 15%, to $84,800 from $99,600.
Other types of debt were also paid down. The proportion of families with credit card balances fell from 46% in 2007 to 38% in 2013.
The combination of the Fed’s low interest rate policies and Americans’ efforts to reduce debts is having major benefits in terms of decreasing the share of incomes that goes to paying debt. For all families, debt service payment is the lowest share of income it has been in any survey going back to 1989. For middle-income consumers, debt service isn’t the lowest on record, but it has fallen from nearly 20% of income in 2007 to 16% today. While that may not seem like much, spending 4% less of income to service mortgages, credit cards, auto loans and other debts leaves more for everything else.
You can read the entire September 8, 2014 New York Times summary of the Fed survey here.