December 11, 2008

Psychology of Bad Times Fueling Consumer Cutbacks

Section 2: Personal Finances and Economic Concerns

While the public continues to rate national economic conditions more negatively than personal finances, the proportion of people rating their own finances as only fair or poor is the highest it has been in nearly 16 years. Currently, 61% say they are in only fair or poor shape financially. That is up only slightly since October (58%), but personal financial ratings are now almost as negative as in August 1992, when 64% rated their personal finances as only fair or poor.

Lower-income people, African Americans and those who are unemployed are the most likely to give a negative assessment of their personal finances. Virtually all (94%) of those who describe their households as struggling express a negative view of their personal finances, compared with 62% of those in working class households and 39% of those in professional or business class households.

Despite people’s gloomy assessments of their finances, most (56%) expect their financial situation to improve at least somewhat over the course of the next year. The proportion saying their finances will improve is about the same as in October (59%), but personal financial optimism is somewhat higher than it was in July (51%), when it reached an all-time low.

Majorities across education levels, income groups and classes continue to be optimistic that their personal economic situation will improve over the next year. Moreover, there is virtually no difference in optimism about future finances among those who rate their current finances negatively – 55% of whom say their situation will get better over the next year – and those who view their current finances positively (57%).

Young people and African Americans continue to among the most optimistic about their personal financial situation over the coming year. Among those younger than 30, more than seven-in-ten (71%) believe their economic situation will improve over the next year. By contrast, just 36% of people 65 and older say that they expect their financial situation to improve, while about as many (37%) expect their finances to get worse. In addition, blacks remain more likely than whites to predict an improvement in their personal financial situation (70% blacks, 50% whites).

Top Economic Worries

Reflecting on their financial situation, about three-in-ten (31%) cite rising prices as the economic issue that worries them most. While this remains a top concern, fewer Americans now cite this than did so in October (38%) and March (49%). Nearly as many (29%) mention problems in the financial markets – this is largely unchanged since October. An increasing proportion (26%) cites the job situation as the economic issue that most worries them, up from 18% in October. Only about one-in-ten (9%) say that declining real estate values are their biggest economic concern.

Just 17% of those with household incomes of more than $100,000 say that rising prices is the economic issue that worries them most, down from 22% in October. By contrast, 45% of those with incomes of less than $30,000 cite rising prices as their biggest worry, which is down modestly from October. Rising prices remain by far the biggest concern for people in this income category.

Concern about the job situation has risen sharply among those with annual household incomes of $50,000 to $75,000: 27% in this income category say the job situation is their biggest economic worry, up from 14% in October. About three-in-ten (31%) of those with annual incomes of less than $30,000 say the job situation is the economic issue that worries them most, which is little changed from October (28%).

Among people with family incomes of $100,000 or more, problems in the financial markets dwarf other economic concerns. About half of this group (49%) say they are most worried by problems in the financial markets, which is far more than the percentages citing jobs and rising prices (17% each).

What’s Affordable

A majority of the public (55%) says that it is generally difficult to afford the things they want in life, while 43% say it is easy. The percentage saying it is difficult to afford the things they want has increased seven points since October and now is approaching the 58% measured in January 1992.

Nearly eight-in-ten (78%) of those with annual incomes of less than $30,000 say it is difficult to afford the things they want, compared with 26% of those who earn $100,000 or more. The percentage saying the things they want in life are difficult to afford is up among all income groups since October.

Nonetheless, when it comes to life’s basic necessities, the percentages saying it is difficult to afford gasoline, food, and home energy costs have all decreased since July. As gas prices continue to drop, only 27% of Americans say it is difficult to afford gasoline, down from 68% in July when gas prices were at their peak. About three-in-ten (29%) say that it is difficult to afford food, a decrease of nine percentage points since July. Somewhat more say that home heating and electricity are difficult to afford (42%), although this too i
s down from 49% in July.

More than four-in-ten (45%) continue to say that health care is difficult to afford and a majority (52%) says the same about taxes; both have changed little since July and February. Most Americans say it is difficult to afford saving for retirement (64%); this is the only item that has increased since July (up from 59%).

Overall, majorities of those with annual incomes of less than $30,000 say that every item mentioned – with the exception of gasoline (42%) – is difficult to afford. In contrast, just 10% of those in the highest income category ($100,000 or more) say that food and gasoline are difficult to afford while just 20% say the same about heat and electricity, and health care. About a third (34%) in this group says taxes are difficult to afford while 45% say the same about retirement.

Food Still Costly for Poor

For people in every income group, gasoline is now easier to afford than it was just a few months ago. Notably, the proportion of people with incomes of less than $30,000 saying it is difficult to afford gas has fallen by almost half since July (from 79% to 42%); the declines among middle-income groups have been even more dramatic.

Yet affording food remains a challenge for 50% of those in the lowest income group, which is largely unchanged from July (55%). By contrast, there have been larger declines in the proportions of those with middle incomes (between $30,000 and $75,000) who say that food is difficult to afford.

Nearly six-in-ten (59%) Americans in households earning less than $30,000 also say they have difficulty affording heat and electricity. By comparison, 44% of middle-income people and just 23% of those earning $75,000 or more report this as a problem.

There has been a slight increase since July in the proportion saying it is difficult to afford saving for retirement (five points), and the increase is seen across all income groups. More people with incomes of at least $75,000 cite difficulty affording retirement saving than say they have difficulty affording gas, food, health care, or other things; still, people in this income group are less likely than people with lower incomes to say that is difficult to save for retirement.

Many Cut Spending

While necessities like gasoline and food have gotten easier to afford, Americans continue to say they are cutting back on spending as a result of what’s been happening with the economy lately.

Fully 62% say recent economic developments have caused them to cut back on planned spending for vacation travel. This is up slightly from early October (59%); in September, just 48% said they were cutting back on vacation spending. There also have been small increases since October in the percentages saying they are reducing other spending. In addition, 73% say they are cutting back on holiday spending, which was not asked about in previous surveys.

The proportion saying they have changed the way they save or invest has increased more substantially, from 48% in early October to 60% today. There is also a six-point increase (from 26% to 32%) in the proportion saying they have adjusted their plans for retirement.

Overall, an overwhelming percentage (91%) says they have delayed or reduced spending, or made another change, as a result of what has been happening in the economy; nearly half (47%) say they have adjusted plans or delayed or cancelled spending in five or more areas.

Austerity Driven by Worry

A majority of Americans (59%) are delaying or cancelling purchases or cutting back on other spending because they worry that their financial situation might get worse in the future, while 28% are cutting back because their financial situation has already gotten worse and made such cutbacks necessary.

Nearly three-fourths (73%) who say they are in excellent or good shape financially say they have cut back out of worry about the future. Similarly, 61% of those whose personal finances are in only fair shape have cut back out of worry. In contrast, a majority (53%) of those who say they are in poor shape financially have cut back out of necessity.

The reason for cutting back on spending also varies by income and self-described class. Fully three-quarters of those with household incomes of $100,000 or more have cut back because they worry their finances might get worse, not because they have already gotten worse. People with incomes of less than $30,000 are more evenly divided; 52% are cutting back out of worry and 40% have cut back out of necessity.

Similarly, 50% of those who describe their household as struggling have made cutbacks because their financial situation has gotten worse, compared with 25% who describe themselves as working class, and just 19% of those who describe themselves as professional or business class.