Financial ups and downs don’t hurt just the poor

Wild swings in income, surprise expenses, scraping by from paycheck to paycheck with no cushion to speak of — that’s how poor people live, right?

Not so: This precarious existence seems to be the economic fate of most Americans today.

A new report from JPMorgan Chase’s research arm examined the deposit and spending patterns of 100,000 of its 27 million accounts during 2013 and 2014. It found that almost all the customers in the sample experienced changes in income and spending of 5 percent or more a month — not a tremendous fluctuation by any measure. But over the course of the year, 26 percent experienced income changes of 30 percent or more —10 percent suffered declines, while16 enjoyed increases.

It’s not surprising that more people experienced an increase than a decline: The economy was expanding during the years studied, and added 5.5 million jobs. But the fact that so many households also took a large hit to their incomes during supposedly good times tells us that the so-called recovery is an anemic one, and that many Americans won’t be surprised by the Commerce Department’s report that the U.S. economy actually contracted 0.7 percent in the first quarter of 2015.

Even more surprising is that there was little variation in income and spending volatility by income level. The richest fifth of account holders actually showed more variation than poorer ones.

Income and consumption changes didn’t move in tandem, either. Just 28 percent of the survey subjects (or “responders”) spent more money when they had more, and less when they had less. These responders were more likely than the general population to be in the bottom quintile, to have maxed out their credit cards and to be on a fixed income, usually social security or pensions.

A third of the sample were labeled “sticky optimists,” meaning that increases in their consumption exceeded real income increases by 10 percentage points or more. Their consumption increased even when their income fell. These optimists tended to be higher earners, though their aggressive consumption can’t be sustainable over the longer term for those who aren’t centimillionaires with no concern for their heirs.

The largest share of account holders, 39 percent, were “sticky pessimists”: When their income rose, their spending didn’t keep pace with their raises, and they cut back when their income dropped. Many analysts have been wondering why retail spending has been so weak despite improvements in the job market. This sticky pessimism could be an explanation — memories of the Great Recession are still alive, making people act more prudently than the overspending American of cliche.

For a large minority of the sample, 39 percent, income and consumption changes between 2013 and 2014 moved in opposite directions. A whopping 60 percent of the sample showed average monthly changes in consumption of greater than 30 percent.

Together, these findings suggest that a large share of the population (a share to which I belong, I have to admit) doesn’t have a monthly budget, with whim or necessity driving spending rather than something like a plan.

It’s hard to make generalizations based on just two years of data, but the looseness of fit between income and consumption changes — a trend that contradicts most received economic wisdom — is striking. Are consumers more cautious than they used to be before the Great Recession? We just don’t have that banking data yet, but it sure appears as though a sizable portion of the American population feels burned by the financial crisis.

The final major finding of the study was that the typical household in the sample (which, by the way, is somewhat better off than the national average – in part because the very poor don’t have bank accounts with JPMorgan Chase) simply did not have the savings cushion necessary to weather the income and spending volatility. The bank estimates that a middle-income household, with a combined income around $50,000, should have about $4,800 in liquid assets on hand to cope with normal monthly ups and downs — but the survey found the average family had only about $3,000. The poorest fifth who live on $23,300 or less per year, should have $1,600 on hand; they have $600. Even the richest fifth, who make around $125,000, falls a little short — they have $13,500 instead of the needed $13,800. (The numbers rise with income because they're based on normal spending patterns.)

In other words, almost all Americans, save for the very richest, are just a few paychecks away from penury. And the consequences of such a precarious lifestyle can’t be fully understood through JP Morgan’s account data alone. Even the report says in its conclusion that “financial insecurity and scarcity exact a mental toll.”

Anyone who has ever had a sleepless night worrying about how to keep the next rent check from bouncing knows this well. It’s well established that unemployment and poverty damage physical and mental health, and it looks as if corrosive economic anxiety afflicts a large number of Americans, including the nominally affluent.

The bank’s proposed solutions, such as tweaking employer payroll schedules and more careful financial planning, look rather weak next to the severity of the problem. Better financial planning and budgeting could help somewhat, but most Americans experience economic uncertainty that can only be alleviated by deep structural changes to the U.S. economy. We have little public support for the poor and unemployed.

A more humane welfare state, with decent income support, publicly funded health insurance, a higher minimum wage, and more worker-friendly labor laws would do a lot to make people happier. A society that experiences the kind of pervasive stress many Americans experience is not one dedicated to the pursuit of happiness that the Declaration of Independence said was each person’s inalienable right. Changing the social-support system — not better financial planning — is the best way to soften the volatility of American economic life.