Boston Fed Study Ties Kids to Consumption During Economic Downturns

Despite the holiday cheer, American consumers are growing increasingly anxious about the economy.

It’s gotten to the point where even those consumers whose wages and wealth have kept pace with inflation are becoming more cautious about what they buy.

While barely a week goes by these days without some sort of mass layoff in the news, the present state of uneasiness is understandable — especially those households with extra mouths to feed.

While this may seem obvious, households with children are far more vulnerable to labor market disruptions and their accompanying economic shocks compared to other households and individuals, researchers from the New England branch of the Federal Reserve dug deeper.

In short, their report found that families bought essential items with stimulus money, but more discretionary items in response to external factors, such as suddenly having to work or educate from home.

Pandemic Learnings

After examining spending in over 5 million ZIP codes, the report showed that stimulus did what it was intended to do, noting the “efficacy of government cash transfers in sustaining household consumption when economic shocks disrupt the labor market.”

During the pandemic, 22 million jobs were lost as unemployment spiked. Large-scale cash transfer programs implemented by the federal government provided a much-needed buffer to Americans, and one that disproportionately benefited households with kids. The relevant programs included the three rounds of stimulus payments, an expanded child tax credit, and the added boost to unemployment insurance.

Those households with children, in effect, passed those benefits on to the overall U.S. economy by increasing their spending on household essentials.

After all, caregivers have more continual and essential needs to provide for than other households of similar income levels. By targeting them and providing increased benefits to families, the pandemic-era government programs acted as a kind of countercyclical economic stimulus by smoothing, and in some cases even increasing, consumption and ensuring vulnerable households felt confident in their ability to meet the basic needs of their families.

The report also noted that families, “with lower income and lower liquidity had a higher marginal propensity to consume following payments,” as they faced increased demand for household necessities following lockdown restrictions relative to the decrease in “going out” expenditures realized by childless households.

Then vs Now

As it turns out, in the absence of stimulus checks, many of these same stretched and lower-income households are now leveraging payment solutions like buy now, pay later (BNPL) to finance their holiday shopping, even as consumer confidence has been trending further downward each month this fall into winter.

These are important findings for policy makers to consider, particularly as Americans continue to tighten their belts and spend conservatively during what may end up being one of the longest inflationary periods in U.S. history.

While economic projections and the employment outlook for next year remain gloomy, the report’s conclusion also underscores the current challenge Federal Reserve policymakers are facing as they try to engineer a soft landing.

“Households with children are more vulnerable to labor market disruptions,” the study found, identifying the quandary that has emerged from a year of record inflation and ongoing threats of recession, on the heels of two years of COVID.