Earning

'The recession has essentially ended' for some, but low-income earners are still bearing the brunt of the coronavirus economy

The "K-shaped recovery" means many lower-income Americans are still struggling to find work while those with higher incomes are reaping the benefits of a booming stock market.

Twenty/20

Over the past two months, signs of an improving economy have given Americans hope. The unemployment rate fell to 8.4% in August after nearing 15% in the spring. The S&P 500 emerged from the bear market and set a new record high in August. New home sales are at their highest level in 14 years.

But the U.S. is still in a "very significant recession," Boston Fed President Eric Rosengren told CNBC earlier this month. More than 26 million people are collecting unemployment benefits, according to data released by the Department of Labor last week. Rosengren says a full recovery won't happen until the coronavirus pandemic is under control.

The recession is still particularly bad for low-income workers, according to the Opportunity Insights Economic Tracker. While high-income earners — those making over $60,000 per year — have largely seen their employment rate bounce back to where it was at the start of the year, the employment rate for workers making less than $27,000 per year is still down 15% since January.

"The recession has essentially ended for high-income individuals," Raj Chetty, director of Opportunity Insights and a professor of economics at Harvard University, told Democratic presidential candidate Joe Biden and his running mate Kamala Harris last month.

At their lowest levels in April, high earners saw a 13% decrease in employment, while low earners saw a 35% decrease.

Industries that were hit hardest by the pandemic-induced shutdowns tend to be the ones where workers are paid the least. Workers in retail and leisure and hospitality earn some of the lowest wages, according to the Bureau of Labor Statistics.

The wealthy benefit disproportionately from stock market gains

Americans' household wealth hit a record high in the second quarter, jumping 7% from the first quarter as stocks rebounded from their lows in March, according to data released by the Federal Reserve earlier this month. And this was before the stock market set new records in August.

To compare, during the Great Recession median net worth fell 39%, the Federal Reserve found. Even so, richer households fared better than others. Households in the top 20% of the wealth distribution saw a 14% decline in their net worth, versus a 39% decline for the rest of households.

The current downturn could exacerbate the economic inequality that accelerated during the recovery from the Great Recession. Some economists worry this could be a "K-shaped recovery," meaning high earners and financial markets do well, while low-earners and the general economy continue to struggle.

This is because wealth is not shared equally. According to the Federal Reserve, the richest 10% of households owned 87% of the stocks at the end of the first quarter, the highest ownership level since record-keeping began in 1989. The bottom 50% owned just 0.7%.

Percent in each household net worth bracket who own stocks
kiersten schmidt/grow Federal Reserve

The wealth of the bottom 50% of the country is largely in real estate, which makes up 54.4% of their net worth. The top 1% have 12.8% of their net worth in real estate.

Percent of net worth in stocks and real estate
kiersten schmidt/grow Federal Reserve

This could also be contributing to inequality because...

Real estate is booming, but only for some

By many metrics, the U.S. real estate market is hot. Sales of newly built homes jumped to their highest level in 14 years in August, and mortgage demand is up 25% from a year ago.

The median sale price of an existing home has been steadily climbing since May and hit a new record of $310,600 in August.

Median sales price for existing homes
kiersten schmidt/grow Federal Reserve bank of St. Louis

But many current homeowners are struggling to pay their mortgages. Of the 8 million FHA-insured loans, those backed by the Federal Housing Administration and issued to low-income and first-time homebuyers, 15.7% are now delinquent, according to second-quarter data recently released by the Mortgage Bankers Association. This is the highest rate since the MBA survey began in 1979 and it means more than 1.3 million of these homeowners are behind on their mortgages.

By comparison, just 8.2% of all loans were delinquent in the second quarter. During the same period in 2019, the rate was 4.5% for all loans and 9.2% for FHA-backed loans.

Delinquency rate for FHA-insured mortgages and all mortgages
Note: Data includes loans 30 day to 90+ days past due, but excludes loans in the foreclosure process.
kiersten schmidt/grow Mortgage Bankers Association

For now, most homeowners are safe, as the Federal Housing Finance Administration extended the moratorium on foreclosures for federally-backed mortgages until the end of the year. And 3.7 million borrowers are in forbearance programs, according to Black Knight, a mortgage technology and data firm.

"While federal and state governments work toward additional economic support, we expect serious delinquencies will continue to rise — particularly among lower-income households, small business owners and employees within sectors like tourism that have been hard hit by the pandemic," Frank Martell, president and CEO of CoreLogic, told CNBC earlier this month.

Overall, 52% of Americans reported being financially affected by the pandemic, per a recent TransUnion survey, and 75% of those are worried about paying their bills. If you're in this group, there are resources that can help.

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