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The Worst Decade for America’s Middle Class |
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FORECASTS & TRENDS E-LETTER IN THIS ISSUE: 1. Middle Class Income & Net Worth are Falling 2. CBO Warns About “Fiscal Cliff” & New Recession 3. What Exactly is the So-Called “Fiscal Cliff”? 4. Fed Leaves Door Open for QE3 at Last Meeting 5. My Reactions to New Movie – “2016: Obama’s America” Today’s Overview We begin today by looking at a new demographic study from the Pew Research Center which contains some stark findings about the American middle class. The study concludes that the last 10 years have been the “worst decade in modern history” for the middle class. A lot of the findings will surprise you. From there we look at some new projections from the Congressional Budget Office which warn what will happen if we fall off the “fiscal cliff.” The CBO predicts that the US will fall back into recession early next year if the automatic tax increases and mandatory spending cuts occur at the end of this year. Next, the minutes from the Fed’s July 31/August 1 policy meeting (just released last week) revealed that the FOMC is indeed considering QE3, and an announcement may be forthcoming at the next meeting on September 12-13. Finally, I will share my thoughts with you on the new documentary movie, “2016: Obama’s America.” I saw Dinesh D’Souza’s film over the weekend and am very glad I did – I learned some things I did not know. More comments appear at the end of today’s letter. Middle Class Income & Net Worth are Falling The middle class is receiving less of America’s total income, declining to its smallest share in decades as median wages stagnate in the economic doldrums and wealth concentrates at the top. A study released last week by the Pew Research Center highlights diminished hopes for the roughly 50% of adults defined as middle class, those with household incomes ranging from roughly $39,000 to $118,000. The report describes this mid-tier group as suffering its “worst decade in modern history,” having fallen backward in income for the first time since the end of World War II. Three years after the recession technically ended, middle class Americans are still feeling the economic pinch, with most saying they have been forced to reduce spending in the past year. And fewer now believe that hard work will allow them to get ahead in life. Families are now more likely to say their children’s economic future will be the same or worse than their own. In all, 85% of middle class Americans say it is more difficult now than a decade ago to maintain their standard of living. Some 62% say a lot of the blame lies with Congress. A slight majority blamed banks and other financial institutions. Just 8% blamed the middle class itself. Timothy Smeeding, a University of Wisconsin-Madison economics professor who specializes in income inequality noted, “The job market is changing, our living standards are falling in the middle, and middle-income parents are now afraid that their children will be worse off than they are.” He said many middle-income families have taken a big hit in the past decade as healthcare costs increased, mid-wage jobs disappeared due to automation and outsourcing and college tuition soared for those seeking to build credentials to get better jobs. In the meantime, more affluent families have fared better in net worth because they are less dependent than lower-income groups on home property values, which remain depressed after the housing bust. Wealthier Americans are more likely to have investments (stocks, bonds, etc.), which as a whole have been quicker to recover from the Great Recession. According to Professor Smeeding, “These are the disaffected middle class who work hard and play by the rules of society, but increasingly see their situation declining by forces beyond their control. No matter who is president, the climb back up for the middle class and the recovery will be slow and often painful.”
The new Pew study reviewed 2010 data from the Census Bureau and Federal Reserve, which defined the “middle class” as the tier of adults whose household income falls between $39,418 and $118,255 in 2010 for a family of three. By this definition, the middle class makes up about 51% of US adults, down from 61% in 1971. In 1970, the share of US income that went to the middle class was 62%, while wealthier Americans received just 29%. But by 2010, the middle class garnered only 45% of the nation’s income, tying a low first reached in 2006, compared to 46% for upper-income Americans. Since 2000, the median income for America’s middle class has fallen from $72,956 to $69,487. “The notion that the middle class always enjoys a rising standard of living is a big part of America’s sense of itself. And in modern times, it’s always been true – until now,” said Paul Taylor, executive vice president of the Pew Research Center. Other Findings from the Study • Who’s to blame: Of the self-described middle class Americans who say it is more difficult now than it was a decade ago to maintain a standard of living, 62% said “a lot” of the blame lies with Congress. About 54% blamed banks and financial institutions, while 47% said large corporations, 44% point to the Bush administration, 39% cited foreign competition and 34% found fault with the Obama administration. Only about 8% said the middle class itself deserves a lot of the blame. (Respondents could select multiple reasons.) • Feeling pinched: About 62% of middle class Americans said they were forced to reduce household spending in the past year, compared to 53% who said so in 2008. Separately, roughly 42% of middle-class adults said their household’s financial situation is worse now than before the recession began, compared to 32% who reported they are now better off and 23% who said their finances are unchanged. Of those who said they were worse off now, about 51% said it will take at least five years to recover, including 8% who said they will never recover. • Diminished hopes: About 63% of the general public – including 67% of the middle class – agreed that most people who want to get ahead can make it if they’re willing to work hard, down from 74% of the general public who believed that in 1999. As for their children’s future, 43% in the middle class say their children’s standard of living will be better than their own, compared to 47% who said it will be worse. In 2008, 51% said their children’s future would be better, compared to only 19% who said it would be worse. • Picking a president: About 52% of self-described middle class adults said President Barack Obama’s policies in a second term would help the middle class, while 39% say they would not help. In contrast, about 42% said that electing Republican challenger Mitt Romney would help the middle class, while 40% said it would not help. People who identify themselves as middle class are more likely to lean Democratic (50%) than Republican (39%). • Declining wealth: Median net worth for the middle class fell 28% over the last decade, from $129,000 in 2001 to $93,000, wiping out two decades of gains. Among upper-income families, net worth edged higher from $569,000 to $574,000. Lower-income families saw net worth fall 45% to $10,000. The Pew survey involved telephone interviews with 2,508 adults, including 1,287 people who identified themselves as middle class, and was conducted from July 16 to 26. The margin of error was 2.8 percentage points for the total sample and 3.9 percentage points for those in the middle class. To view the study, go to: http://www.pewsocialtrends.org/2012/08/22/the-lost-decade-of-the-middle-class/. Since consumer spending accounts for apprx. 70% of GDP, this latest Pew study on the middle class helps to explain why this economic recovery is so anemic. CBO Warns About “Fiscal Cliff” & New Recession Last week the non-partisan Congressional Budget Office released new economic projections and more warnings about the so-called “fiscal cliff.” Specifically, the CBO warned that if Congress does not take action to reverse the expiration of the Bush tax cuts (and other tax breaks) on December 31, and if it fails to reverse the so-called “sequester” (large spending cuts for the Defense Department and others), the US economy will fall into a new recession early next year. The chart below shows the CBO’s projections for a recession early next year.
Moreover, the CBO urged Congress not to wait until after the election to tackle the fiscal cliff issues. Specifically, the CBO said that all the uncertainty about the fiscal cliff is causing consumers and businesses to pull back on spending NOW, which is causing the economy to grow by less than the CBO projected earlier in the year. In addition to forecasting a new recession next year if we go off the fiscal cliff, the CBO warned that the unemployment rate would jump back above 9% fairly quickly. Even if Congress acts before the end of the year, and we avoid the fiscal cliff altogether, the CBO now expects weaker economic growth in 2013 than it forecasted earlier in the year. The CBO now projects GDP growth of only 1.7% for all of 2013 – again, that is IF we avoid the fiscal cliff. The CBO also downgraded its latest forecast for 2012 to 2.1%. On the one hand (and without saying so specifically), the CBO seemed to be urging Congress to extend the various tax cuts and delay the onerous spending cuts so that we avoid the cliff. On the other hand, as in previous reports, the CBO noted that allowing the tax hikes and spending cuts of the fiscal cliff to come to pass will significantly shrink the nation’s budget deficit in coming years. In 2013, for example, the CBO projects that the deficit would be $641 billion if the US goes over the cliff versus an estimated deficit of $1 trillion if current taxing and spending policies are extended. The bottom line is that we face a very nasty and dangerous political fight just ahead that will not be good for the markets, in my opinion. The Democrats hate the spending cuts, and the Republicans want the Bush tax cuts extended for everyone. President Obama vows to use his veto unless the Bush tax cuts are eliminated for those taxpayers in the top two brackets. I have suggested recently that a lot of investors may decide to sit out the very uncertain election on the sidelines, which will be bad for the stock markets. Others may decide to join those on the sidelines after the election because of the nasty and dangerous fiscal cliff battle that we all know is coming. I’ll have more to say on this matter in upcoming E-Letters. What Exactly is the So-Called “Fiscal Cliff”? Since we will be hearing more and more about the fiscal cliff between now and the end of the year, here is a quick refresher on what’s involved. The fiscal cliff is Washington shorthand for the huge number of significant provisions that will either expire or take effect at midnight on December 31, if Congress does nothing. The implications for the economy are huge. The fiscal cliff includes:
If you’re counting, that all adds up to $607 billion, but the CBO estimates that the government will take in $47 billion less than projected due to the shock all these taxes and spending cuts will have on the economy. Most agree that the net number is around $560 billion. That is the combined negative effect that going over the fiscal cliff will drain from the economy next year. And as discussed above, the CBO strongly believes that a hit of that magnitude will send the economy into a new recession next year. Fed Leaves Door Open for QE3 at Last Meeting The minutes from the July 31/August 1 FOMC meeting were released last Thursday, and they send the strongest signal yet that the Fed is considering new steps to bolster the sagging economic recovery. The minutes noted that more stimulus measures would be needed fairly soon unless growth substantially and convincingly picks up. The Fed minutes left little doubt that a clear consensus was building at the meeting for a move that is bound to be controversial, coming in the midst of the presidential campaign. The minutes noted: "Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery." The minutes, distributed with a customary three-week lag, showed that the Fed’s own staff agreed that projected growth in 2013 might not be fast enough to significantly reduce the jobless rate. Some officials expressed worries that the economy’s slow growth makes it highly vulnerable to outside shocks, which could push it back into recession. The Fed has already spent more than $2 trillion accumulating mortgage and Treasury securities in two bond buying programs. It also has launched two rounds of a program known as “Operation Twist” to buy $667 billion in long-term Treasury securities, while selling short-term Treasuries. Both are meant to drive down long-term interest rates and push investors toward buying stocks, while spurring spending and investment. The Twist program’s goal is to do this without enlarging the Fed’s overall portfolio of securities or expanding the money supply, which critics say would be inflationary. The Fed has several tactical questions to resolve. If it launches more bond buying (QE3) – and once again expands its portfolio of securities – it could opt to suspend the Twist program that is now scheduled to run through the end of the year. If QE3 is large, the Fed likely would need to purchase mortgage and Treasury securities so as not to tread too heavily into either market. Finally, you might have heard something late last week about a letter from Bernanke to Rep. Darrell Issa (R- CA), word of which gave the stock markets a boost on Friday. Basically Bernanke advised Issa that the Fed still has the scope for more stimulus, should it determine that it is needed. None of Bernanke’s remarks in the letter should come as much of a surprise, given that he has consistently maintained that the central bank is ready, willing and able to take further action – should it deem such efforts necessary. The next major clue to the Fed’s latest thinking will likely be Chairman Bernanke’s August 31 speech in Jackson Hole, WY. It is not clear if Bernanke will have any surprises, but you can bet the markets will be hanging on his every word. Regardless of what Big Ben may say on Friday, the markets are expecting an announcement of QE3 following the next FOMC meeting on September 12-13. We’ll see. Dinesh D’Souza’s Documentary “2016: Obama’s America” I’m not much of a movie-goer but I did feel compelled to go see 2016, especially because it is a documentary on Barack Obama’s life and the major influences on him. Now I consider myself a pretty knowledgeable guy when it comes to politics, and about Obama in particular. But there were several things in this movie that I did not know. You need to see it. Without giving anything away, I would just say that this film should set off alarm bells, even among some liberals. I suspect that more than a few liberals will come away from the movie and conclude: Wait, that’s NOT what I signed up for! Unfortunately, not many liberals will see this well-documented film about Obama’s life and major influences because they think it’s just a hit-piece. But this movie is not what you think it will be. I would urge both liberals and conservatives to see this movie before the election. Wishing you a Happy Labor Day weekend,
Gary D. Halbert SPECIAL ARTICLES
You Call This An Economic Recovery? (very good)
Investors and economists agree: No QE3
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The Pew study is just the latest indicator of a long-term trend of widening US income inequality. The Census Bureau reported last year that income fell for the wealthiest – down 1.2% to $180,810 for the top 5% of households. But the bottom fifth of households – those making $20,000 or less – saw incomes decline 4%.
Our do nothing Congress seems to be content to delay any action on the fiscal cliff until after the election when there will be precious little time to reach several decisions on critical issues. We could be looking at a similar fiasco to what we saw just over a year ago when the debt ceiling battle threatened to shut down the government. Only this time, it could be even worse!
