Federal Reserve research provides lots of useful data about U.S. financial health, but its broad focus sometimes obscures intriguing specifics. Now a new study by the St. Louis Federal Reserve Bank has dug beneath the national averages to take a close look at family balance sheets. In a paper called "The Unequal Recovery: Measuring Financial Distress by ZIP Code," researchers cleverly analyzed the big numbers to identify financial distress among households.

The authors considered two periods since the end of the financial crisis: 2010-2015 and 2015–2018. The first period, early in the recovery from the wreckage of 2008, was characterized by economic uncertainty and doubt. During the later three years, by contrast, the recovery was becoming so robust that the Fed thought it was prudent to begin raising interest rates.

To determine changes in financial stress levels, the researchers looked at “the percentage of people within a ZIP Code that have reached at least 80 percent of their credit limit, that is, the maximum balance that they can hold on their bank-issued credit cards.” They compared that debt against measures of household assets, including median home prices, stocks and bonds across these two time periods.

Doing this produced a better read on distress levels than simply looking at the average for each ZIP Code.

The contrast between national and household results was fascinating. Looked at from a high-altitude perspective, the recovery appeared to the St. Louis Fed to be a broad one that slowed down a bit once interest rates started rising toward historically normal levels. But when the researchers zoomed in, they saw something different: an uneven, bifurcated economy still hobbled by the crisis.

Unevenly distributed levels of education and employment are frequently cited reasons that the recovery has been so lumpy. To those factors, the St. Louis Fed researchers suggest adding two more: assets (i.e., capital) and reliance on debt.

People with assets like a home, a fully funded retirement plan, stocks and bonds are more insulated from economic downturns. These people typically are burdened less by debt, are less dependent on credit availability and are less affected by increased interest rates.

Debt makes the most mischief in the poorest ZIP Codes measured by average gross income. Since 2015, debt and financial distress have been rising the fastest in those areas. Debt and financial distress rose the slowest since 2015 for the wealthiest households.

The poor and middle class have less total debt than affluent buyers of expensive homes, nice cars and high college tuition. But those lower on the economic scale rely more on borrowing for day-to-day costs, which means that some of their standard of living had been subsidized by the unusually low interest rates that prevailed over the past decade. When the Fed began raising rates, those at the bottom felt it most acutely.

The affluent carry less debt as a percentage of their total assets, so they are better able to manage rate increases — it simply affects them less when rates go higher.

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