Household Distress during the COVID-19 Pandemic

In a February Economic Synopses essay, authors Jeffrey Cohen, Cletus Coughlin, William Emmons, Jacob Haas and Lowell Ricketts discussed a national measure of household distress that they created. Perhaps surprisingly, they wrote, recent levels of household distress were below average compared with the past 21 years.

“Expansive government policies that include income support, extended unemployment insurance, low interest rates, and relief from default or foreclosure may help explain low levels of reported distress,” the authors wrote. However, they added, a major concern is that policy measures are simply postponing rather than eliminating the household distress.

A Measure of Household Distress

To create their household distress index, the authors combined 13 variables to capture a broad measure of household well-being. They noted that the variables provide information on households’ employment, income, housing wealth, spending and ability to make debt payments.

The figure shows that the index rose in response to the three most recent economic downturns. For example, the index increased dramatically during the Great Recession, peaked at 2.46 in September 2009 and slowly declined from 2011 through early 2020, the authors pointed out.

In contrast, the index spiked during the early months of the pandemic but dropped sharply during the latter half of 2020. It peaked at 1.29 in April 2020 and was -0.33 in December 2020, close to pre-pandemic values, the authors noted.

What Is Driving Household Distress?

The authors also examined the contribution of each variable to the overall household distress index in December 2020.

They found that labor market measures (elevated unemployment, reduced work hours and a lower labor force participation rate) collectively were a leading driver of distress. On the other hand, a relatively low foreclosure rate, as well as strong real estate price appreciation and sales, reduced the index.

“Economic policies, including income support and a federal foreclosure moratorium, may have mitigated or eliminated measured distress; or these policies may have masked and postponed it,” the authors concluded.

Additional Resources

• Economic Synopses: Measuring Household Distress and Potential Policy Impacts
• On the Economy: COVID-19 across Counties with Different Pre-Pandemic Financial Distress
• On the Economy: Racial and Ethnic Disparities in Housing Distress during the Pandemic