‘Things are pretty crappy.’ 1 in 4 US households are living paycheck to paycheck

A Bank of America Institute analysis reveals that 24% of U.S. households are living paycheck-to-paycheck in 2025, with lower-income households disproportionately affected (29% from 27% in 2023), highlighting a widening economic disparity. This 'K-shaped economy' sees high-income wage growth (4%) significantly outpacing middle (2%) and lower-income (1%) gains, with the latter two falling behind inflation. This deepening affordability crisis is further evidenced by record-high subprime auto loan delinquencies (6.65% in October, Fitch Ratings) and a growing risk of labor market deterioration, signaling potential headwinds for consumer spending and credit quality.

Analysis

A Bank of America Institute analysis indicates that 24% of US households are projected to live paycheck-to-paycheck in 2025, with lower-income households increasing from 27% in 2023 to 29%. This highlights a widening K-shaped economic divergence, as high-income wages grew 4% year-over-year, significantly outpacing middle-income (2%) and lower-income (1%) gains, with only the former exceeding the 3% September inflation rate.

This deepening affordability crisis, driven by five years of price hikes outstripping income, poses a significant risk to the consumer-driven economy, as cautious spending by struggling families could weaken economic foundations. Goldman Sachs economists project a 20-25% chance of the US unemployment rate rising by at least 0.5 percentage points within six months, signaling potential labor market deterioration.

Mounting financial distress is evident in credit markets, with subprime auto loan delinquencies reaching a record 6.65% in October, according to Fitch Ratings, surpassing Great Financial Crisis levels. This metric, historically a late payment priority, underscores severe strain among a segment of borrowers, despite some credit card users paying off full balances.

Key Decisions for Investors

• Investors should re-evaluate exposure to consumer discretionary sectors given the deepening affordability crisis and potential for reduced spending by a significant portion of households.
• Monitor credit quality metrics, particularly in subprime lending and auto finance, as rising delinquencies signal increasing default risks and potential contagion.
• Assess companies' sensitivity to a deteriorating labor market, considering Goldman Sachs' increased probability of rising unemployment and its impact on consumer confidence and demand.
• Consider the implications of persistent wage disparity and inflation for companies reliant on lower-to-middle income consumer bases, as their purchasing power continues to erode.