America's discretionary income is under siege and it's only getting worse.
According to Census data analyzed by Patchwork Nation, 140 million Americans live in counties where the average family income has decreased in the last 30 years. That's being exacerbated as pump prices rise, leading to consumer resolve to cut discretionary spending.
Just don't take away our toasters.
Earlier this month the U.S. Energy Information Administration predicted gas prices will average 77¢ a gallon higher than in 2010. That forecast is already up 40¢ a gallon over its February prediction as oil prices react to the unrest in Libya and its neighbors. The prediction was made before the U.N. passed the no-fly zone and the conflict escalated. Some analysts are now looking at $5 a gallon gas prices by summer.
In this month's Ad Age/Ipsos Observer survey of American consumers, 91% said they were already feeling the difference in the cost of filling the tank. Of those, more than half plan to immediately cut back on discretionary driving. Nearly half plan to cut back on other discretionary spending immediately. When asked about their spending if high gas prices persist for more than a month, those figures approach 75%. The exclusive online survey of 1,000 representative U.S. households was conducted in early March.
How much the price fluctuation will impact them depends on where they live. Ad Age has produced the Gas Price Hardship Index in partnership with Patchwork Nation. We analyzed gas-price data from Gasbuddy.com, and income and spending data from ESRI to determine which counties are most at risk to gas-price increases. The Index is based on calculations of a $1.00 increase in average gas prices and the percent of discretionary income that those inflated costs will consume.
Nearly 70 million people will live in counties where an average of 15% or more of discretionary income -- defined as income after taxes, housing, food and clothing -- goes to gas expenses, assuming driving patterns remain constant. If the gas prices do spike to $5 a gallon, nearly every county will be above 15%, with 78 million people in counties where it's greater than 20%.
The U.S. Energy Information Administration predicts "considerable regional and local variation" in gas prices and we see that with the Hardship Index. At the state level, the hardest-hit states are widely dispersed: Oregon, Georgia, Kentucky, Alabama and Iowa.
At the county level the Index peaks in: Atchison, Mo.; Lafayette, Wis.; Rutherford, N.C.; McCreary, Ky. and Gonzales, Texas.
The Patchwork Nation project has identified 12 types of communities in the U.S. based on similar demographic, political, religious and economic characteristics. When filtered through those types, gas prices hit each of its county definitions rather evenly. Major metropolitan areas, which tend to have alternative forms of transportation available, were affected at similar levels to rural communities and Sun Belt communities of empty nesters.
Naturally, as consumers have less income, and more things competing for greater shares of it, there's a risk for nonessential products. But what items are considered "necessary" are different for different demographics. "When a household sits down they will either implicitly or explicitly prioritize what is important to them," said Doug Skuta, an economist at ESRI. "Higher gas prices certainly crowd out spending in other areas. It's all about choice."
What our survey found is that some previously discretionary items are becoming essential, and vice versa.
What items are becoming part of that "new necessity" pantheon? We asked if consumers "have and need," "have, but don't need," "Want," or "don't want" 18 different household items. According to the survey, 85% see a car as something they "have and need" or "want." The results for a second car were more mixed.
Among respondents, 25% of those who own a second car don't think they need it. Some 16% who don't have one want one. Other items we can't live without now include ATM and debit cards, microwaves and toasters. In these days of relaxed corporate dress codes, one in three iron owners and nearly half of those with sewing machines don't feel that they need them. More than half of us can't live without a home coffeepot.
The least "wanted" items were gym memberships and home gyms.