(Kitco News) – Optimism regarding the health of the U.S. economy remains relatively upbeat, with many economists seeing the chance of a recession as unlikely as the U.S. labor market remains robust. However, according to one organization, elevated financial stress among Main Street consumers paints a slightly different picture.
Last week, LegalShield, a Legal services company that provides Americans with easy and affordable access to legal advice, counsel, protection, and representation, released its monthly Consumer Stress Legal Index (CSLI). The company said its index dropped to a 12-month low in March falling to 61.4.
“All three sub-indices that make up the flagship index, Bankruptcy, Consumer Finance and Foreclosure, declined in March,” the company said in its report.
In an interview with Kitco News, Matt Layton, SVP of Consumer Analytics at LegalShield, said that despite the decline, the index has been in a holding pattern for several months as consumers try to juggle their finances faced with stubborn inflation, which is forcing the Federal Reserve to maintain its restrictive monetary policies.
Although consumer financial stress is well down from its highs seen during the 2008 Great Financial Crisis, it is up from the lows seen following the COVID-19 pandemic.
“[Financial] stress began to increase as the Federal Reserve began increasing interest rates,” said Layton. “We saw stress continue to increase during the entire tightening process. Since then, we’ve seen a kind of pause. People are waiting to see what happens next.”
LegalShield’s stress index adds to the growing anecdotal evidence that despite healthy economic activity, a robust labor market, and elevated equity markets, consumers in the real economy are struggling.
Layton noted that LegalShield provides a unique perspective because its index is not based on surveys or sentiment. It is based on consumer requests for legal help. Since 2002, the company has received an average of 150,000 legal inquiries each month. The index collects data related to Bankruptcy, Consumer Finance, and Foreclosure.
“For the last couple of months, we have talked about what we see as a disconnect between the macro and the microeconomic indicators because, over the last several months, there’s been almost a parade of news about how great the economy is,” Layton said. “We believe our data digs deeper down, and we don’t see a picture as rosy at the microeconomic level as the macroeconomic indicators would suggest. Every day, people on the street still feel the crunch regardless of what some of the financial news is reporting.”
Although Financial Stress has been relatively elevated in recent months, Layton noted that the Index has a high negative correlation with gold. However, he also pointed out that given the high price of gold, many Main Street consumers are unlikely to use the precious metal to hedge against economic uncertainty.
Financial Stress levels could determine U.S. election
One correlation Layton said he will be watching closely is consumer financial stress levels in critical swing states as this could determine who wins the next election.
According to historical records, when consumer stress levels are below the national average in key swing states, the incumbent or party in power has the advantage. However, the inverse is also true; when stress levels are above national averages, the party out of power has the advantage.
According to LegalShield, The swing states reported a drop in stress of 4.5 points to 60.0, just slightly below the national index.
“Right now, Democrats should be happy, but a lot can change between now and the election,” said Layton. “It will be important to watch these stress levels in August and September.”
In a further breakdown, the company said consumer stress rose in blue states that voted Democrat in 2020 by 2.4 points to 66.8, above the national level and 10.3 points (18%) higher than in red states. In contrast, red states experienced stress relief in March by 5.5 points to 56.5, below the national index.
The company also noted that blue states have exhibited higher stress than red and swing states every month since October 2006.
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