By Elliot Eisenberg, Ph.D., GraphsandLaughs, LLC
During the last year and especially the last five or six months, the economic data have been of two minds. On one hand, household net worth is way up, the stock market has been setting new highs and the number of millionaires is at 9 million, just below where it was before the recession. At the same time, we read that the amount spent at restaurants, bars, and department stores recently fell as households compensate for higher gas prices and payroll tax increases by reining in discretionary spending. Which is it? Is the economy getting better or are households hunkering down? Turns out, it’s both. Behind this seeming paradox is the growing gulf between America’s wealthier households and its poorer ones. And the past recession has put this gap into bold relief.
While suffering during the Great Recession, wealthier households, because they are more likely to own equities and a home, have enjoyed the recent rise in house prices and the stock market, as well as the special year-end dividends that were timed to avoid tax increases that went into effect the first of this year. In addition, because they can borrow money at today’s historically low rates, they are spending more on vacations, cars and other high-end discretionary purchases as their financial situation improves. Moreover, over the last few years their incomes have been rising, something the majority of the population has not been experiencing.
By contrast, households in the bottom half of the income distribution are having a tough time of it. The combination of stagnant wages in the years before the Great Recession, large job losses during the recession, current high levels of unemployment, the dramatic increase in those unemployed 12 months or more, high gasoline prices and delayed income-tax refunds are forcing these households to forgo many purchases. As such, retailers that cater to lower and middle-income Americans are feeling the pinch. Worse, the payroll tax hike will probably take three or four months before its impact is fully felt.
Fortunately, those in the top half of the income distribution are doing well and they pack a lot of retail punch. The top 20% of households account for 38% of all spending while the top 50% of all households account for 70% of all spending. By contrast, the bottom quintile is responsible for a tad less than 9% of all spending. And so far, higher income households have been carrying the load, with spending most recently rising at a month-over-month rate of 0.7%, the best level since a 0.8% gain in September 2012.
Despite high-income households facing higher taxes due to the expiration of the Bush tax cuts and everyone facing the vagaries of the sequester, the economy is not on the ropes. A diet of dirt-low interest rates, a booming energy sector, and solid improvement in the all-important cyclicals including autos, big ticket items, business fixed investment, and most importantly homebuilding, should translate into increases in middle- and lower-class employment and (hopefully) wages, and thus more household spending among those doing relatively little of it now.
Elliot Eisenberg, Ph.D. is President of GraphsandLaughs, LLC and can be reached at Elliot@graphsandlaughs.net. His daily 70 word economics and policy blog can be seen at www.econ70.com.