Musings on the Plight of the American Middle Class

It’s a beautiful Memorial Day as I write this. Here in our little river town, in the great flyover, the sun is out after a week of rain, but we are happy to soak in some of the humidity.

This is also the Daily Pfennig® Sunday edition published closest to the anniversary of D-Day, June 7th, 1944. A large number of our family members will be headed to France later this summer to stay at a friend’s home in Normandy. Along the way we’ll all be sure to visit the beaches and remember the events that took place there. I’ll spend a special moment at Utah Beach where Chuck’s father came ashore and survived, but where many of his buddies did not.

The estate where we’ll be staying in France, Chateau Courtomer, set me to thinking about wealth. While there doesn’t seem to be any current political royalty suggesting, “Let them eat cake” (and apparently neither did Marie-Antoinette), there is clearly some level of unrest boiling up on both sides of the political fence this year. Articles from think tanks left, right and center have been proposing policy actions to “solve” the changes they have observed. There’s always something to worry about.

We have observed in the Daily Pfennig® newsletter many times that the topic of Real Median Income is a popular, important and controversial subject. It seems that Real Median Income in the U.S. was in a serious decline after the Great Recession and has been slow to rebound.1 In the past, when soldiers returned home from WWII, the economy grew robustly—at least through 1970. But now it seems that the rising tide doesn’t lift all landing craft.

A couple times last year, here, and here, I covered the topic of wealth in America. As a definition for the wealthy, I suggested: “the sustainable ability to reasonably buy what you want without regard to budget – whether retired or not.” Now I would like to cover the lower tiers.

Middle Class/Income America
I imagine it’s nice for a politician to craft speeches that address the largest number of people. In 1970, for example, middle class households (defined as the equivalent of earning between $42,000 and $125,000/year in today’s terms)2 represented about 62% of U.S. aggregate income – that’s a clear majority, and sounds like the place to aim your policy weapons. Today that number is closer to 43%. To balance the picture: Over the same period, the “upper class” rose from about 29% to 49%, and the “lower class” stayed pretty level moving from 10% to 9%.3

It’s interesting that over this time period, roughly matching the period since the U.S. completely abandoned the Gold Standard in 1971,4 the decline in the middle class appears to be a shift towards the upper end, but this ignores the fact that actual incomes of the lower and middle classes have remained mostly static while the upper end has climbed significantly. Of course this is an average and depends highly on where you live- especially metropolitan areas.

In Atlanta, for example, the Washington Post reports that the middle class fell from about 60% to about 48%, but the lower class grew from about 25% to about 41%, with the upper class declining somewhat.5 Maybe not the economic miracle we all think of when we consider Atlanta.

Oil boomtown, Midland, Texas, on the other hand, saw the middle class fall from about 55% to about 42%, while the lower class declined from about 28% to about 20%, and the upper class climbed from about 18% to about 36%.6 Nice to be in an industry where there is a lot of demand and a lot of activity to go around.

Each metropolitan area, it seems, has its own story to tell.

So what does this have to do with investing?

There are a number of actions that will likely be undertaken based on these numbers.

First, the Federal Reserve appears to be staring very hard at the white board to see if they will enter the words “raise rates in June” in their meeting notes, or write down “let’s look later.” Much of what the Fed has focused on has been done with the intent of boosting spending – much of it by the middle class.

As I showed last year in the Pfennig, however, much of the benefit has gone to higher net-worth individuals as real estate and equity markets have risen significantly over the period of time the Fed has been undertaking various forms of Quantitative Easing. Hourly wages and median income have not. Our bet is that while the Fed may raise rates in June to maintain their definition of credibility, it is very likely that the Fed remains heavily supportive, probably leading for now to a continuation of rising asset prices.

I think I have mentioned before that, for my two cents, it’s time to let the markets decide rates.

Second, both leading presidential candidates are likely to focus on the declining size of the fabled middle class. It is good politics, and to the extent that we think Congress will be taking any action at all over the next couple years, it’s probably a place where government will try and pass some legislation. So far the talk has included a variety of possible policies that appear to address only one side of an issue. Rolling back free trade may help some businesses, but will hurt all consumers. Boosting infrastructure spending lifts short-term employment and activity much like the Works Progress Administration, but probably adds to the budget deficit and misallocates capital away from productive enterprise. Read what passes for platforms these days and create your own analysis of plusses and minuses.

You can handicap the election yourself – it’s a year where I am happy to not be running a betting book – and make investment choices based on your best guess.

Until the next Daily Pfennig® edition…

Frank Trotter
EVP & Chairman
EverBank Global Markets Group