The aggregate headline economic data shows things are not all that bad, and the recovery is proceeding modestly along — why then, the disconnect?
Perhaps the answer is found in the annual Census Bureau report on consumer income; it slipped out almost unnoticed last week. This report may have gotten overlooked, coming out as it did contemporaneously with Katrina. But it raises important issues, touching as it does on so many elements of our thesis of an anemic and waning, stimulus-driven expansion.
It also is stimulative of discussions regarding the development of income classes in the United States in the late 20th and early 21st Centuries.
Here are some of the details, via the WSJ:
"Although the U.S. economy grew robustly last year, the income of the median household slipped a bit, wages of full-time workers fell, the number of Americans living below the poverty line rose and more Americans went without health insurance, the Census Bureau said in its annual report on consumer income.
The snapshot suggests that the recovering economy, while adding jobs and showing productivity gains since the recession of 2001, isn’t paying dividends to everyone. The economy grew by a healthy 3.8% in 2004, but the new Census Bureau report underscores that one unusual feature of the recovery has been sluggish gains in income for many, particularly at the bottom and middle. The share of all income going to the top fifth of households rose slightly to 50.1% last year, matching the 2001 high and well above the 45.2% reported in 1984, the bureau said."
This explains, in large measure, the disconnect between recent polling data of Americans — from Presidential Approval Ratings at their lows to weak Economic expectations — versus a specific sub-group of upbeat Dismal Scientists.
But while historical trends continue — of course the poor get poorer and the rich get richer — the really intriguing part of this picture is the middle class squeeze. Let me remind readers that throughout most of economic history, there have only been two classes: The Rich and the Poor. Today, we arguably have 4 economic strata: The Poor, the Middle Class, the Rich, and the Ulltra-Wealthy.
I find two elements of this to be utterly fascinating:
The diminishing Middle Class, as well as the rise of the Ultra-Wealthy:
1. The diminishing Middle Class A large population occupying the economic strata between the rich and the poor is a relatively recent — and potentially fleeting — post-war phenomena. There have been merchants and craftsman for thousands of years, but they were much closer in lifestyle to the poor than the rich. On a scale of 1-10, with the poor at 1 and the rich at 10, I’d put this group at a 3. It wasn’t until the post WWII period where the middle really moved towards, well, the middle, occupying a range from 4-6. (These #s are not quantifiably derived — they are rough estimates).
I wonder if today we are at the onset of this group becoming a considerably smaller. Think about the jobs that used to pay a comfortable wage + benefits, from manufacturing to postal workers, that are going away or getting downsized or simply replaced by technology and/or the private sector.
Consider also the reasons why GM and Ford have such competitive legacy problems — they are competing against Korean and Japanese companies who’s government pays for many of the expenses of their rising middle class — healthcare, child care, retirement accounts, etc. And the competition from Chinese firms is so intense because their workers are willing to accept wages that moves them from the 0/1 range on the 1-10 scale to a 2-3.
Some Americans have adapted by throttling back their lifestyle — in effect becoming lower income. Others have gotten the entrepreneurial spirit, started their own gigs, and moved further upstream. But for the most part, the middle class is getting squeezed smaller, with each end of the bell curve distribution moving (up or down) into the adjacent class.
My fascination with this is how it impacts consumer spending and the comapnies affected by that.
2. The Ultra-wealthy have always been around — Rockefeller, Carnegie, Frick, Guggenheim, etc. What’s so intriguing to me about this is how the Ultra-Wealthy class has expanded wildly over the past 20 years, thanks to a combination of 3 elements: a) a technological meritocracy; b) a readily available method of cashing out the benefits of that meritocracy via options and the stock market; c) a significant drop in the highest tax brackets.
Even without the Market, Bill Gates would have been a billionaire. He made money the old fashioned way — monopoly profits ala the Rockefeller or Carnegie model.
But think about all the other players who are Billionaires w/o the advantages of a monopoly: Steve Jobs, Larry Ellison, Jeff Bezos, Meg Whittman, Scott McNealy, John Chambers, The Yahoo and Google Boys, Michael Dell, Mark Cuban, Andy Grove — and thats just tech. I haven’t even mentioned all the telecom Billionaires. The past few years gave the major insiders of the home builders an opportunity to cash out — and they have been doing so in droves, entering that rarified group. That’s before we get to the Real Estate moguls, the Hedge Fund billionaires, or the big entertainment money.
I’m guessing that there are more people in the U.S. with a net wealth in excess of 250 million dollars (inflation adjusted) than ever before. Thats truly astonishing. And given my fascination with multiple variables, I wonder if the same underlying factors are the root cause of these changes (i.e., globalization and the maturing of capital markets) — or if there is any sort of a causal relationship between the two (I doubt it, but good luck trying to quantify it) .
But I digress.
Here’s the snapshot on household income and wages:
click for larger chart
Courtesy of WSJ
The relevance to markets, of course, is that 70% of our GDP is consumer related. Much of that spending comes from the middle and lower classes. How flush they feel is a key to future spending patterns.
Here’s some of the specifics from the Census Bureau via WSJ:
"Median income fell most sharply in the Midwest, where it dropped 2.8% to $44,700, though it remains $300 higher than the national average. The drop — accompanied by a rise in poverty in the Midwest — partly reflects the disappearance of high-wage manufacturing jobs.
Across the country, the Census Bureau said, median earnings for full-time workers employed year-round dropped significantly last year. Men’s earnings declined by 2.3% to $40,798 and women’s 1.0% to $31,223. The data, which don’t reflect employer-provided health benefits, measure pretax income.
The fraction of Americans living below the official poverty line — $19,307 for a family of four last year — rose for the fourth consecutive year to 12.7% in 2004 from 12.5% the year before, the bureau said. Last year, 37 million Americans were living in poverty, about 1 million more than the year before and 5.4 million more than in 2000 when poverty bottomed out as the economy peaked.
The poverty rate rose for non-Hispanic whites — to 8.6% from 8.2% the year before — while falling among Asians to 9.8% in 2003 from 11.8%. Among blacks and Hispanics, there wasn’t any significant change, the Census Bureau said. The biggest increase was among people between the ages of 18 and 64, rising to 11.3% from 10.8%. Among those 65 and over, the poverty rate fell to 9.8% from 10.2%. The Census Bureau poverty data don’t reflect noncash government benefits, such as health insurance or food stamps.
The Census Bureau also said that the percentage of Americans without health insurance remained stable at 15.7% in 2004. The number lacking insurance increased by 800,000 to 45.8 million while the number with public or private health insurance increased by two million to 245.3 million."
Intriguing developments well worth watching.
UPDATE: September 10, 2005 10:14 am
For a fascinating variation on the Meritocracy/Plutocracy discussion, see this post from Dan Gross: PLUTONOMICS
Income, Poverty, and Health Insurance Coverage the United States: 2004
By Carmen DeNavas-Walt, Bernadette D. Proctor, Cheryl Hill Lee
U.S. Department of Commerce
Economics and Statistics Administration
U.S. CENSUS BUREAU, August 2005
Recovery Bypasses Many Americans
Despite Economic Growth, Median Household Income And Wages Fell Last Year
ROBERT GUY MATTHEWS
THE WALL STREET JOURNAL, August 31, 2005; Page A2
U.S. Poverty Rate Was Up Last Year
By DAVID LEONHARDT
Published: August 31, 2005