The Incredible Shrinking Middle Class

The New York Times just had a great piece highlighting some of the statistics around personal income and spending by various market segments.  The data which tracks income and spending since 1992 is eye opening, although the story does illustrate the old adage that “figures never lie, but liars often figure”. According to the NYT….

The top 5 percent of earners accounted for almost 40 percent of personal consumption expenditures in 2012, up from 27 percent in 1992. Largely driven by this increase, consumption among the top 20 percent grew to more than 60 percent over the same period.”

 

Their source is not the only source speaking to the shrinking middle class which has been the ongoing demographic story since the earliest days of the Clinton administration in 1992, past Bush and continuing,despite best efforts and speeches, well into the Obama years. Blame is bipartisan in this case…..for what is referred to the as the “hourglass economy”.  However the data is a bit misleading and not all is as rotten as it seems.

What The Data Isn’t Showing

The fantastic increase at the top 1% is thanks to a combination of liquid security markets with great new online businesses at stratospheric valuations, which skews the data to the point where it creates the impression that purchasing power has declined. The reality is that the economic pie (GDP) has grown but the growth went disproportionately to the top earners.

But through lower costs of living (compare the price of a Macintosh in 1992 to an iPad today, let alone Dell vs Samsung) Americans are enjoying quality of life improvements with the same or LESS dollars.  After housing a car is the most significant spend that a family makes.  Thanks to low interest rates, autos have never been cheaper to own or lease as a monthly cost.

The other big change is that physical labor, historically the way under-educated but motivated people could achieve a middle class life, has been outsourced.  This is through a combination of dirty industries being off-shored and low capital costs that allow higher capital investment to replace expensive American workers. So listen to your mother, school matters more than ever.

So Where is The Good News?

The article takes the easy way of mentioning a Loehmans in New York City being replaced by a Barneys as a symbol of middle class evaporation- this is misleading at best.  Manhattan is an Island of the 1%. The author failed to mention that two of the best performing retailers in the city (not just in the boroughs) are Uniqlo and H&M, hardly paragons of the rich and famous.  Or are they? As the US census site points out, poverty is not static:

  • 15% of the country may live in poverty at this moment
  • However during the past three years over 35% of the country has experienced poverty for a one year period.

The high end is no different.  On Monday you may feel rich enough to shop at a Barney’s or eat at a Capitol Grill, but on Tuesday it’s H&M and the corner deli. One year it’s a bonus. The next year Dodd Frank sends your job and bonus to London or Singapore…..

Marketers are adjusting to the bifurcating economy, but it’s too easy to link bad operators to mega trends. There are plenty of restaurants that are middle class focused (McDonald’s coffee anyone outside of NYC? It’s really good.) They are succeeding despite the names they mentioned that are having a hard time. Good value in quality or price will always sell. JC Penny’s is a failure in both and struggling, but the SAME customer is flocking to its competitors either online or in-store. For example Macy’s has gone upscale in image, but priced many items at prices that make Kohl’s and JC Penny’s blush!

Omitted in the story is the net improvement in the savings rate which was almost zero for many years up to the 2007 recession. As reported by the U.S. Bureau of Economic Analysis, the lowest reading was in April of 2005  of .8% and in November 2013 the savings rate was above 4%.  That’s a massive change.  I would suggest that the majority of Americans learned their lesson from the great recession. They are spending less and saving more since they know that they must rely on themselves for retirement. So maybe it’s not all doom and gloom as the Loehman’s deprived writer posits? Maybe we all know better and appreciate Andrew Carnegie’s comment that “Capitalism is about turning luxuries into necessities”….. Affordable ones!