Dreams of the middle class deferred by the recession

The recession has stalled the expectation of upward mobility in the American middle class: The unemployed are forced to live frugally, while many others choose financially cautious paths.

When Melissa Pavick gave birth to her first child in 2008, the future looked wide-open. Mrs. Pavick enjoyed her work as a freelance photographer, and her husband had a good job as a systems engineer. The couple was happy enough in their two-bedroom home on a busy road in Pascoag, R.I. They'd bought the house in 2005 for $242,000; its appreciation was "an important first step in getting ahead," Pavick says. The plan was to start their family and then to move to a new home, on a quieter street, with more bedrooms and a bathroom upstairs.

But now, with their active toddler able to dart into the road, which is 10 feet from the front porch, and a second child on the way, the Pavicks' middle-class dream is stalled.

The new house isn't happening anytime soon – the couple holds negative equity in the current one. Nor is there money to replace Pavick's nine-year-old Mazda. Her photography business has dried up. Wedding shoots that used to last all day now run two hours, and the volume of work has dwindled. The Pavicks have learned to economize, rarely going out for dinner or entertainment, and using the Internet to bargain shop. Diapers for their son arrive in bulk from the amazon.com subscription program. This year's vacation was three days' shared accommodations in Maine.

It's not that things are bleak: Even though the Pavicks hold their breath when the defense contracts that underpin Mr. Pavick's company are renewed, he still has his job. Their health insurance premiums keep rising, but they have good coverage. And although they're in debt, in a house that continues to lose value, they have a roof over their heads.

Mrs. Pavick, a warm woman who laughs easily and often, recognizes all this. Still, it's not what she imagined: "We presumed things would be easier. We've had to adjust our reality." Indeed, the family's savings are nil, and they'd be in real trouble if Mr. Pavick lost his job. Their dream house is further away now than when they married. The word Mrs. Pavick arrives at is "stuck." "We're going to be here for a very long time," she says.

• • •

Blame it on the housing crisis, a lack of jobs, the banking debacle, taxation, national debt, inflation, a power surge from developing nations. Whatever it is, the economic prospects of the American middle class are not what they were three years ago.

A Pew Research Center survey in June showed that 55 percent of adults in the US labor force have experienced a period of unemployment, a pay cut, a reduction in hours, or have been involuntarily reduced to part-time status in the past 30 months.

The response has been a collective belt-tightening: More than 6 in 10 Americans in the Pew study reported cutting back on spending since the recession began.

Preexisting conditions have compounded the effects of the downturn, says Sheldon Danziger, professor of public policy at the University of Michigan in Ann Arbor. "Many of the labor market factors that sharpened during this recession have been going on for 30 years. What intensified this time around was that on top of those forces you had the housing crisis and the stock market collapse. That made things more severe for millions of middle-class Americans."

Indeed, home foreclosures are expected to exceed 3 million in 2010, up from a historic high of 2.8 million in 2009, according to RealtyTrac. Contributions to 401(k)s and other retirement plans are dramatically down. Unemployment is 9.6 percent; millions are underemployed or out of the job market altogether. Jobless benefits are running out, and the unemployed and underemployed alike have drained their savings.

By necessity and sometimes by choice – if hedging and downsizing based on an uneasy commingling of fact and fear is "choice" – middle-class Americans are cutting back, doing without, in some cases turning to extended family members and outside agencies for help.

They are part of the new normal – a downwardly mobile cohort adjusting to a diminishing standard of living.

They are families like the Pavicks, who are in a holding pattern.

Take, for example, Adrienne Allen, a former stockbroker and single mother who left the corporate world voluntarily to raise her daughter. She supports her 9-year-old well, juggling five jobs – including her own small gift-basket business and substitute teaching. But the market has stalled her effort to flip her old home, and she has instead rented it out. Meanwhile, she has moved to her aunt's house in a rural area of southern California to live cheaply and save money: "In the past, I would have bought where I wanted and made things work out," she says. "[But] I don't want to overextend in this climate."

Another example is Mike Stewart and his disabled wife in Wisconsin, who, in the aftermath of his 2009 layoff as a soils lab technician, rely on their widowed mothers to help support themselves and their two children. The situation, says Mr. Stewart, makes it "hard to hold up my head."

Others in a holding pattern are like William Mize in San Francisco, who worked for a specialty insurance firm and prided himself on having perfect credit. Unemployed for most of the past two years, Mr. Mize has experienced a sharp about-face: "[M]y credit cards are in default. I am behind in my rent.… I am on food stamps and soon to be on general assistance from the city. Basically, I am on the verge of being homeless."

Service agencies across the nation are reporting record levels of need. At the Emergency Care Help Organization in suburban Brandon, Fla., director Joni Damico says many of the people who line up in the morning for food and clothing have never before asked for assistance. "Some of them can barely get their stories out because they're so choked up," she says. "They've never needed help, and now they're forced to choose between paying their bills and buying food."

Nearby, at Sarasota Jewish Family and Children's Services, CEO Rose Chapman recently tripled her staff. "There's been a real uptick in need," she says. "It's a horrendous situation."

• • •

To a large extent, "middle class" is a self-designation, more a state of mind than a matter of numbers. Pew findings suggest that 53 percent of Americans consider themselves middle class: that includes 40 percent of those with incomes of less than $20,000, and 33 percent of those earning more than $150,000.

What's clear, in any case, is that Americans in the economic middle are struggling to maintain their lifestyles. According to the 2010 MetLife Study of the American Dream, a majority of employed Americans would be close to financial ruin if they lost their jobs: 45 percent said they could not cover expenses for more than a month, and 65 percent could not do so for more than three months. And fears of unemployment are high, with 55 percent concerned about losing their job. Two-thirds of those surveyed said they don't have an adequate safety net (including cash, retirement savings, and auto, health, home, and life insurance).

Yet even as people struggle to make ends meet, needs and expectations continue to increase. Of those who responded to the MetLife study, 58 percent believe the bar keeps rising in terms of "basic necessities."

People also are expecting more from the American dream itself. Since the first study in 2006, MetLife respondents were more likely to define the dream as financial security (from 59 percent in 2006 to 65 percent in 2010), family and children (from 42 percent to 58 percent), a comfortable retirement (from 31 percent to 36 percent) and marriage (from 21 percent to 29 percent). No component of the dream decreased during this time.

The gap between expectation and reality doesn't surprise Robert Rector, senior research fellow at The Heritage Foundation. "Americans are accustomed to having continually rising material living standards," he says. "Every time you look, there's an increase in the amount of stuff people have. Virtually everyone has multiple TVs and ACs, things that were luxuries 30 years ago.... Struggling to make ends meet now means putting food on the table and paying the cable bill."

In the context of the recession, Americans were lulled into cycles of borrowing by the expanding economy that preceded it, Mr. Rector says. "Clearly people speculated on housing with an expectation that [the expansion] would go on forever. They got carried away."

There are those who take a tougher stance, even among the ranks of the unemployed. Richard Monihan, a New Jerseyite laid off two months ago from his job as vice president of sales operations for a media company, says, "What I've seen is people having outsized expectations. We have to live within our means.… We really got away from that."

• • •

Melissa Pavick, for one, doesn't think her expectations are outsized. Sure, she splurges on organic food for her family, and she would love to replace her kitchen cabinets. But the values she holds – family, hard work, service – were deeply instilled by her Roman Catholic upbringing. Her father, a carpenter, sometimes worked as many as four jobs at a time, and her mother ran a day-care business out of the family home.

Five minutes into a conversation with Pavick, it is clear that family and a meaningful life matter far more to her than material success. After college she worked as a product manager for a company that produced cable TV and on-demand systems. It was never a perfect fit: When she was laid off in 2002, she decided to pursue freelance photography rather than seek another corporate position. "I didn't want to be consumed by my job. I didn't want it to be all about work all the time," she says.

Since then, she's worked as a waitress and a substitute teacher to augment her photography income. As one component in achieving a stable family life, money does matter, and it's tight. Yet on certain things she will not compromise. The family is going to have to remain in a house that doesn't suit them, but Pavick is insisting on adding a back entry to ensure safety for the kids. If the couple has to spend down savings to do it, so be it.

A similar sentiment exists nationally. New figures from the Investment Companies Institute show net withdrawals from equity mutual funds totaled more than $33 billion in the first seven months of 2010. Many Americans are taking money out of their investments to maintain their living standards, says Damien Hoffman, cofounder of WallStCheatSheet.com. "A lot of people are living off of principal. There's no way to get around that," he says.

Further evidence of distress, adds Mr. Hoffman, is Fidelity Investments's report of a sharp increase in the number of 401(k) participants seeking loans or hardship withdrawals in the second quarter of 2010. "These are basically emergency ways to fund yourself," he says. "Where is the middle class going to be if they draw down their 401(k)s drastically over the course of the next few years?"

• • •

Inside the Emergency Care Health Organization (ECHO) in Brandon, Fla., 55-year-old Brenda Nygaard isn't giving much thought to 401(k)s. Hers is mostly gone, in any case, and she has more immediate concerns: food and clothing, and the fact that she doesn't have insurance to pay for treatment of a tooth that's been aching for days.

Along with a half-dozen other families, all of whom have undergone a rigorous screening process on a recent morning to qualify for ECHO's assistance, Mrs. Nygaard and her husband, Stan, are here to receive a week's worth of food: canned and baked goods along with fresh meat and vegetables. She is picking out some clothes, too, and shoes to replace the ones the dog chewed. It's the first time the couple – who live in a three-bedroom home in nearby suburban Riverview – has ever turned to a public-assistance agency.

They peruse the tidy aisles, bypassing school supplies and stuffed animals to linger over a rack of skirts. Apart from an occasional squawk from an infant resisting her bottle, the place is mostly quiet. Occasionally the front door opens and another family enters – a blond woman with a toddler, a couple in cutoffs. The Nygaards stand out a little – partly because they're older, and partly because they're carefully dressed, as if for an outing, with Mr. Nygaard in tan shorts and a striped shirt and Mrs. Nygaard in a silky blouse, with carefully styled hair.

In November 2008, Mrs. Nygaard was laid off from her job as billing clerk for the local Chevrolet dealership. Since then she's had a few stints of temporary work, but mostly the couple is living on Mr. Nygaard's Social Security, enough to just cover the mortgage for their 1,400-square-foot house, and Mrs. Nygaard's unemployment benefits, which are significantly less than her former earnings. They economize by almost never going out – an exception is breakfast at McDonald's a couple of times a week. Until their freezer broke recently, they were buying their food in bulk from Angel Food Ministries, a nonprofit relief agency.

All this contrasts with the way things were nine years ago, when the couple married. "We were doing really well," says Mr. Nygaard of those earlier days, when he was also working, as a self-employed insurance agent. "We had our bills paid, and we had money left over." They traveled to see family, took vacations, gave money to their church. They had enough, too, to help the six children they had between them. (Their 20-year-old son still lives with them part time.) It was not an extravagant life, but it was a satisfying one.

Then the health insurance market collapsed – "There was just nothing left," Mr. Nygaard says – and Mrs. Nygaard lost her job. Things started sliding downward.

The couple seems more surprised than bitter about the circumstances that have brought them to ECHO on a warm September morning. They come across as thoughtful, deliberate people who listen to each other carefully. "We're still in love," says Mr. Nygaard. He loops an arm around his wife, who smiles up at him. Even so, behind burgundy designer glasses, Mrs. Nygaard's eyes reveal her feelings. They flash when she talks about her former job at the car dealership – "Fifteen years, that's how long I was there." And tears form in her eyes when she talks about how long it's been since they were able to travel to Minnesota and Iowa to see her husband's older children.

"Well, we do what we can by phone," Mr. Nygaard says, to which she nods mutely.

Her eyes fill again when she talks about the day she got laid off, and what that must have been like for her elderly mother, who learned that evening that Mrs. Nygaard's brother had lost his job, too, as a manager for a software company.

At around 1, the couple's groceries have been readied and packed and it's time to check out. Mrs. Nygaard wheels the grocery cart, which is almost full. Mr. Nygaard follows behind with the bags of clothing and shoes.

They are off to a dentist, someone Mr. Nygaard found who he hopes will see his wife for a reduced fee. "He said he'd try to work something out," says Mr. Nygaard. They push through the door, out into the strong Florida sunlight.

The last of ECHO's clients this day – a dark-haired couple with three children and the blond woman, who balances her toddler in one arm and a stack of books in the other – begin to check out.

• • •

After the clients leave, Some ECHO volunteers emerge to straighten racks and mop the floor with a potent mixture of Fabuloso. Since its founding in 1987, the agency has expanded, filling retail space after retail space in this former strip mall. The intake office, food pantry, clothing facility, donation center, and boardroom now run the length of the building.

The Nygaards are only one of several middle-class families from the Brandon area who completed ECHO intakes in recent days, Ms. Damico says. There will be more tomorrow. A few blocks away, at the Women's Resource Center of Tampa, director Cheryl English says her agency also has seen a significant increase in need among the middle class. Even though the place originated to provide services to women, Ms. English recently opened it to men, too. Wednesday is now "Men's Day," when they receive counseling, case management and, when necessary, clothing and food.

Nationwide, as middle-class Americans seek government aid, often for the first time, the scenario draws comparisons to the Great Depression, when a whole sector of the population turned to a new social safety net provided by the government. Millions are collecting unemployment benefits for the first time. Millions more are finding themselves qualified for fuel assistance or government-subsidized job retraining programs. Record numbers of people are also receiving food stamps – 1 in 8 Americans, according to the Department of Agriculture, with many more eligible.

To address the plight of families facing homelessness, the Obama administration created the Homelessness Prevention and Rapid Re-Housing program within its $787 billion economic stimulus package. It also added $2 billion for subsidized child-care programs for 2009 and 2010, on top of the expected $5 billion a year.

Even with all that, it's not clear that the total of assistance provided by public and private entities is keeping pace with the need. No wonder, then, that Americans across all income levels are spending less and saving more. In that sense, too, the situation is not unlike the Depression, after which a generation developed an attitude of thrift that remained for decades.

But Mr. Monihan, the unemployed media executive, sees the emerging "mind-set of scarcity" as a potentially destructive force. "[P]eople aren't sure what's coming," he says. "You can see that from the habits that are forming. Even if they're employed and have savings, they're not spending."

And spending, of course, is a prerequisite for economic recovery and expansion.

In spite of some sobering realities – the permanently altered jobs landscape that economist Danziger describes; ongoing instability in the housing sector; and a national debt that looms over everything – Monihan is hopeful about his own and the nation's prospects. He's been unemployed before, and he's bounced back. He'll do so this time too, he says.

In the meantime Monihan's two teenage sons have learned to "temper their expectations" and do without name-brand lacrosse helmets and iPhones.

• • •

In Rhode Island, Mrs. pavick works part time teaching technology at a Catholic school. She's thinking about returning to college for a second bachelor's degree, in education. A teaching career would enable her to spend time with her growing family and earn a decent income, she says.

The choices she and her husband have been forced to make during this recession have given her "a better appreciation for the concept of a balanced life."

Optimism, resilience, enterprise: perhaps middle-class America is more aptly defined by the convergence of these attributes than by income brackets.

A couple of days after the trip to ECHO, Mr. Nygaard reflected on his situation. "What I felt being there was guilt," he says. "A lot of people seem so much worse off than we are. I hate the idea of taking handouts."

He and his wife, says Mr. Nygaard, are attending a class once a week, working toward "an employment prospect" about which he is mostly mum. In the meantime, they will rely on support from friends and family, their Christian faith, and their love, which "has only been strengthened" during the past year, he says.

His regret?

"I don't buy her enough flowers." He is quiet for a few moments. "They don't last, but, still... I should."