The middle class is not ready for the looming recession


Christopher Pulliam and Isabel V. Sawhill

The conversation around wealth has mainly focused on how much total wealth the top has relative to everyone else and the implications for fairness and political economy. But another role for wealth—to create a cushion against income shocks— now needs to take center stage. The COVID-19 crisis will produce a virtually unprecedented shock, and the middle class does not have much of a cushion.

The overall personal saving rate is relatively low at just under eight percent. While the savings rate has increased substantially since just before the Great Recession, it is nowhere near historic highs of over 13 percent. These savings flow into assets which can be drawn upon in an emergency. As the economy falters, many in the middle class will now need to draw on whatever assets they have.

Personal Saving Rate


Source: U.S. Bureau of Economic Analysis, retrieved from FRED, Federal Reserve Bank of St. Louis

Thin financial buffers for the middle class

Here, we define the middle class as the middle 60 percent of the income distribution in terms of what a family usually makes in a given year—ranging from $25,300 to $111,400 in 2016 (the latest year for which data is available). The median middle-class family has total liquid assets, defined as checking accounts, savings accounts, money market accounts, call accounts, and prepaid cards, of just $4,000. Unsurprisingly, the top quintile is more secure with a median of $31,300 and the bottom quintile is even less secure, with just $600.

Median Liquid Assets by Income Group

Bottom QuintileMiddle ClassTop Quintile20002005201019952016$0$5,000$10,000$15,000$20,000$25,000$30,000$35,000$0$35,000

Source: Authors' analysis of the Survey of Consumer Finances

For some of the middle class (the third and fourth quintiles), by 2016 liquid assets had regained the levels achieved before the Great Recession. For the second quintile, liquid assets have remained stagnant since 2004. Now, middle class families may need to draw on their limited assets again.

Median Liquid Assets Within the Middle Class

Quintile 2Quintile 3Quintile 420002005201019952016$0$1,000$2,000$3,000$4,000$5,000$6,000$7,000$8,000$9,000$0$9,000

Source: Authors' analysis of the Survey of Consumer Finances

A common statistic in this context is that 61 percent of Americans say they would not be able to cover a $400 emergency expense easily. As we and others have explained before, this fact is often miscited as 61 percent of Americans can’t cover a $400 expense. According to the original survey, just 12 percent of Americans say they can’t cover a $400 expense. The remaining 27 percent said they could cover the expense but would need to use some combination of a credit card, taking out a loan, or selling something.

The struggle to cover the economic gaps from COVID

Regardless, it’s clear that many households are not prepared for the economic downturn. A recent study from the Federal Reserve concluded that 6 in 10 households do not have enough liquid assets to cover three months’ worth of expenses. The impending recession is likely to last longer than three months; the average duration of a recession between 1945 and 2001 was 10 months.

Of course, middle-class families have other assets beyond what’s in their bank accounts. Median middle-class net worth, or total assets less total liabilities, is about $87,000. However, just five percent of middle-class assets are liquid while almost 60 percent are tied up in primary residences, retirement accounts, and businesses. Even if families could sell these assets, they would be risking their homes, security in old age, and, for some families, their primary source of income. Further still, the mad dash for cash has roiled markets in recent weeks—making selling a particularly unappealing option.

Asset Composition of the Middle Class

Primary ResidenceQuasi-Liquid Retirement AccountsBusinessesLiquid AssetsOther Financial AssetsOther Nonfinancial Assets

Source: Authors' analysis of the Survey of Consumer Finances

So how can we shore up the cash of the middle class? Our colleague, Joshua Gotbaum has laid out a compelling framework: speed matters. The fastest way to keep cash flowing is to keep payrolls flowing, followed by sending checks to households and expanding unemployment insurance. Some have even argued for the federal government to act as the “payer of last resort”, where the government covers businesses’ necessary costs and continues to pay workers.

The Federal Reserve has acted decisively and quickly, and seems committed to using all of the tools at its disposal. Now Congress and the administration have picked up the baton. At the time of writing, the Senate has passed a stimulus package worth about $2 trillion that includes business loans and grants, direct payments to households, expanded unemployment insurance, and assistance for states and for the health care system. Hopefully, actions by policymakers will provide sufficient cash to middle-class families to weather this economic storm over the coming months. But depending on how long the recession lasts, more may be needed.

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