Consumer stress levels spiked in July despite rosy economic forecasts

For a brief moment after the July jobs data came out worse than expected, everybody suddenly worried that the U.S. economy was heading toward a recession. That lasted about two days. Now, the soft landing narrative is back in play, according to mainstream pundits and government officials. 

Normal, everyday people apparently missed the memo.

LegalShield's Consumer Stress Index rose 5.8 points in July, the biggest single-month jump in over two decades. The index rose to 67.6, the highest level since November 2020 when governments shut down the economy during the pandemic.

LegalShield senior vice president of consumer analytics Matt Layton said, “The picture isn't as rosy as what the macro-level indicators would lead us to believe.” 

“We're certainly not in the business of predicting [recessions], but what we can say is that there has been an accumulation of [financial] stress over the last several years. The July surge tells a story of a kitchen table economy that contrasts with key positive macro indicators, including falling producer and consumer inflation and a stock market trading at near record highs.”

Layton said he doesn’t think the July reading was a one-off anomaly.

“Early August data that we're seeing shows consumer stress consistent with the levels that we reported in July.”

According to LegalShield, the index “examines findings from approximately 150,000 calls received monthly from U.S. consumers seeking legal help,” and is comprised of three subindices: bankruptcies, foreclosures, and consumer finance 

The bankruptcy subindex increased by 6.1 points in July to 35.6. It was the highest level since February 2020 and the largest single-month increase since July of that year. The bankruptcy subindex was up 28.8 percent year over year.

The foreclosure subindex rose 6.0 points to 42.3 in July. That figure was up 2.9 percent year over year, breaking a trend of four months of year-over-year decline. It was the largest single-month increase since November 2020, and the index's highest level since December 2023. 

The consumer finance subindex moved up 2.4 points to 104.1. This subindex measures intakes related to financial issues such as billing disputes, vehicle repossessions, and payday loans. It was the biggest single-month increase since December 2023. In one bit of good news, the consumer finance subindex was down 3.6 percent year over year. 

Layton said consumers are feeling the stress of long-term price inflation coupled with a higher interest rate environment.

“People don’t call a lawyer because they’re looking for a good time. They call because they’ve got a problem and they’re looking to improve their situation.”

Layton noted that while price inflation appears to be cooling, that doesn’t mean prices are coming down.

“There’s a compounding effect over several years of that higher inflation that is really beginning to show in our data.”

He said expected Federal Reserve rate cuts may provide some relief, but it will take a while for the impact to work its way through the economy.

“A lot of things are going to have to flow through the system until that rate cut gets down to the everyday person living their life and paying their bills.”