New paycheck-to-paycheck research with ‘unhappy summer’ looming

With S&P Global Ratings acknowledging that the U.S. economy “could be facing an unhappy summer,” LendingClub Corp. released findings from the 11th edition of the Reality Check: Paycheck-To-Paycheck research series, conducted in partnership with PYMNTS.com.

LendingClub highlighted the Financial Distress Factors Edition examined the financial lifestyle of U.S. consumers who live paycheck to paycheck, the factors that cause financial distress — life-cycle events or life-altering events — and the impact of these financial stressors on their lives.

One of the intriguing takeaways from the new research was 65% of paycheck-to-paycheck consumers have experienced a financially stressful event in the past three years, with sudden income disruptions such as losing a job being the most common.

Moreover, LendingClub noted that half of paycheck-to-paycheck consumers say their salary only covers basic expenses and is one reason behind their financial distress.

“Consumers have experienced a tough last couple of years as different factors have affected their financial lifestyle and there seems to be little relief in sight,”, LendingClub financial health officer Anuj Nayar said in a news release.

“While the specific nature of the event that causes financial distress may vary, it’s clear we all need to plan for the unexpected. It’s simply a matter of time before something will come up to knock even the best laid financial plans askew,” Nayar continued.

LendingClub explained that living paycheck to paycheck means devoting all of one’s salary to expenses with little to nothing left over at the end of the month, yet many of these consumers remain credit-worthy, actively managing their cash flows in real time.

The company added that paycheck-to-paycheck consumers fall into two categories: those who can pay their monthly bills easily and those who struggle to do so.

More potential turbulence

In another news release, S&P Global Ratings pointed out that recent indicators show a resilient economy through June, despite rising prices and interest rates, “but there appear to be cracks in the foundation.”

Analysts continued, “As we inch toward potential recession, we expect the Fed’s stronger action to slow hiring and raise unemployment. Under such a scenario, the ‘cure’ for the U.S. economy and jobs market may feel worse than the disease.”

S&P Global Ratings made those assertions in its report Economic Outlook U.S. Q3 2022: The Summer Of Our Discontent published here.

“We continue to expect U.S. GDP growth to slow to 2.4% this year, in line with our preliminary May forecast, though 80 basis points lower than our March estimate of 3.2%,” S&P Global Ratings U.S. chief economist Beth Ann Bovino said in the news release.

“As people learned to live with COVID-19 and prove resilient so far to higher prices at the checkout stand, economic momentum will likely protect the U.S economy this year. What’s around the bend in 2023 is the bigger worry,” Bovino continued.

S&P Global Ratings explained extremely high prices and aggressive rate hikes will weigh on affordability and demand. With the Russia-Ukraine conflict and China slowdown exacerbating supply chains and pricing pressures, analysts said, “it’s hard to see the economy walking out of 2023 unscathed.”

Analysts continued by saying, “We now forecast a low-growth recession in 2023. GDP growth will slow to just 1.6% — well below the economy’s estimated potential growth rate of around 2.0% — given continued higher prices and borrowing costs as cumulative rate hikes take hold. The unemployment rate will climb 70 bps to 4.3% by the end of 2023, reaching 4.8% by the end of 2024 and over 5% by the end of 2025.

S&P Global Ratings added, “We expect the Fed to continue to frontload rate increases this year and reduce the size of its balance sheet. We expect the federal funds rate to reach 3.00%-3.25% by year-end. Rates will climb to 3.50%-3.75% by the end of 2023 and remain there until the first rate cut in third-quarter 2024 as the Fed waits for inflation to near the 2.0% target, which will occur in second-quarter 2024.”

Impact of major life events on living paycheck to paycheck

To understand the drivers of financial distress, the new LendingClub report surveyed consumers about life-cycle events such as getting married or divorced, birth of a child, moving residences and retirement, and financially life-altering events such as a job loss, serious illness, disability, or major unexpected expenses such as a natural disaster or lawsuit.

According to the data, more than half of U.S. consumers have faced either a life-cycle event or a life-altering event in the last three years. Life-cycle events, such as marriage or having a child, are the most common events, with 38% of consumers overall having experienced these situations in the last three years. The share jumps to 51% among millennials but drops to 30% among baby boomers and seniors.

Life-altering events such as losing a job or facing serious illness in the household occurred to 33% of all consumers in the last three years.

While low income is cited as a cause of financial distress, paycheck-to-paycheck consumers from high-income brackets and large households cite paying for a family member’s expenses as a driver of financial distress. In fact, nearly 40% of paycheck-to-paycheck consumers earning more than $250,000 say this is a factor driving their financial struggles.

LendingClub went on to note that one in five consumers living paycheck to paycheck have spent more than what they have earned in the last six months, with those struggling to pay bills seeing their savings cut in half over the past year. 

Close to half of all paycheck-to-paycheck consumers say their salary only covers basic expenses and is a reason behind their financial distress.

“While many consumers leverage credit as a financial tool to manage expenses and cash flow during financially distressing events, high-income consumers tend to use it more,” LendingClub said.

To view the full report, visit this website.

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