The Financially Fragile American Consumer

Last Updated May 24, 2011 1:16 PM EDT

The consumers you depend on to buy your products and services are in an extremely fragile economic state, with almost half saying they probably couldn't come up with $2,000 in 30 days.

A new study published by the National Bureau of Economic Research paints an exceedingly gloomy portrait of the financial stress suffered by American families. Respondents were asked to answer a simple but telling question: Could you come up with $2,000 in 30 days to pay for an emergency? The lowlights:

  • 24.9% of respondents reported being certainly able to raise $2,000.
  • 25.1% probably able.
  • 22.2% probably unable.
  • 27.9% certainly unable.
Going down a level, households with the most vulnerability were those, as you might expect, with low income or large income losses, low education levels and families with children. But the biggest surprise may be the large numbers of middle class citizens who lump themselves in the financially fragile category, "reflecting either a substantially weaker financial position than one would expect, or a very high level of anxiety or pessimism. Both are important in terms of behavior and for public policy," according to the report.

These results are stunning. When Harvard Business School professor Peter Tufano, one of the authors of the report, related the results to more than a hundred of his colleagues at a recent seminar -- a polished crowd that tends not to surprise easily -- a collective gasp filled the room.

Why did the researchers choose $2,000? The amount reflects "the order of magnitude of the cost of an unanticipated major car repair, a large copayment on a medical expense, legal expenses, or a home repair."

The research was done by Annamaria Lusardi of the George Washington School of Business, Daniel J. Schneider of Princeton University and Harvard's Tufano. Although offering no policy recommendations other than citing the need for more research, the group did suggest some possible steps to be considered:

  1. Government support in the form of tax and regulatory policies that support long-term asset building.
  2. Help from financial institutions in terms of new products that facilitate emergency support.
  3. More academic studies on how consumers cope with financial surprises. For example, do they depend on family support, sale of assets or additional borrowing to get by? What is the state of family financial literacy, and how can that be improved?
What are your colleagues and customers telling you about their financial state? Does it support the results reported by NBER?

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(Photo by Flickr user TheDarkThing, CC 2.0)
  • Sean Silverthorne

    Sean Silverthorne is the editor of HBS Working Knowledge, which provides a first look at the research and ideas of Harvard Business School faculty. Working Knowledge, which won a Webby award in 2007, currently records 4 million unique visitors a year. He has been with HBS since 2001.

    Silverthorne has 28 years experience in print and online journalism. Before arriving at HBS, he was a senior editor at CNET and executive editor of ZDNET News. While at At Ziff-Davis, Silverthorne also worked on the daily technology TV show The Site, and was a senior editor at PC Week Inside, which chronicled the business of the technology industry. He has held several reporting and editing roles on a variety of newspapers, and was Investor Business Daily's first journalist based in Silicon Valley.