Many Families Were Financially Vulnerable Before the Recession Started
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The coronavirus pandemic has quickly upended people’s lives as communities and governments try to protect people’s health and save lives. Every day new data show the economic fallout from this necessary response to the deadly disease. The Federal Reserve just released its seventh iteration of the Survey of Household Economics and Decisionmaking (SHED), depicting the financial situation and vulnerabilities of American households in October 2019, just a few months before the pandemic started. To account for the rapidly changing situation, the Federal Reserve added a supplemental survey in April 2020 as the pandemic got under way. The combined data for 2019 and 2020 highlight the financial insecurity of many households before the crisis and in the early stages of the recession.
The SHED is a Federal Reserve survey created in the wake of the Great Recession. It is designed to provide a regular and quick overview of the financial vulnerabilities of American families with an emphasis on low-income and moderate-income ones. It is a key data set that considers labor market measures, household finances and financial risks to families such as unexpected health care emergencies. These data will be a crucial way to identify which households were financially most vulnerable to the massive economic disruption from the pandemic in October 2019, so that policymakers can target their interventions to those who need financial help the most. The survey is best known for its question on whether a household can come up with $400 in an emergency. For 2019, the share of households that could access cash or other sources such as selling things to cover the costs of a $400 emergency was 63%. This means that 37% of households could not come up with $400 in an emergency and would have to skip on paying bills or take out high cost loans.
Many quickly lost their jobs in March 2020. About one-in-five people lost their job or saw their hours cut in March 2020. In fact, 40% in families with incomes of less than $40,000 reported a job loss in March. Among these households, only 46% could come up with $400 in an emergency and only 64% could pay all of their bills. In comparison, 68% of those without job losses or reduced hours could come up with $400 for an emergency and 85% could pay all of their bills. While financial insecurity is much greater among those who lost their jobs or hours at work, still one-in-six of those with no labor market impact from the pandemic couldn’t pay all of their bills. The pandemic hit at a time when many families were still not financially secure.
An important aspect of the survey is that it provides insights into the risks that families regularly face. Health risks are probably the most salient ones in the current environment. The SHED asks people whether they skipped any health care due to costs and, if so, which one. For instance, 18% skipped dental care and 14% did not go see a doctor when they were ill in 2019. Overall, 22% of those with health insurance skipped care due to the costs, suggesting that limited and inadequate health insurance coverage can often put families’ finances at risk. As the pandemic spread, many families were confronted with the potentially dire consequences of new debt if they got sick from the virus.
Financial vulnerabilities stemming from the lack of savings to cover emergencies such as falling ill are not evenly distributed. The SHED primarily focuses on the distribution of financial weaknesses by income, but it also includes a few nuggets on the distribution of financial security by other important aspects. For example, it includes data on households in rural and urban areas. Rural residents were less likely to rate their local economies positively with 53% than was the case for urban residents (65%) in 2019. Along the same lines, rural residents were less positive about their own financial situation than urban residents were. The virus has not spared rural areas and has recently risen rapidly there. Many families in both rural and urban areas are vulnerable to the financial effects of getting ill and not having a job, but that risk seems to be somewhat larger in rural areas.
The Federal Reserve’s latest data paint a rather detailed picture of American families’ financial vulnerabilities. Financial weaknesses were widespread in October 2019, after a record labor market expansion that started in 2010 and only a few months before the pandemic and massive recession started. While many households were vulnerable to financial hardship in case of an emergency, that risk was higher for people of color, for people in rural areas, for lower-income households and for households with less than a college degree than for whites, urban residents, higher-income households and those with a college degree. But, the mounting evidence, including the Federal Reserve data, shows that it is exactly those households that feel the brunt of the recession. The quickly unfolding, deep recession will undoubtedly exacerbate existing inequities. The new data will help policymakers understand exactly who was most vulnerable, so that they can hopefully target their solutions accordingly.