The Haves and the Haves Less

In the decade leading up to the pandemic (2010-2019), median household income grew by more than any other decade since the 1970s. The income increases were also relatively broad-based, experienced by both the lower income cohort (+17%) and the middle class (+15%). Then came COVID. At the onset of the pandemic, the U.S. government rushed to alleviate some of the financial burden of its citizens by handing out stimulus checks and enacting a number of programs designed to ease the financial suffering. As consumers were deprived of their ability to indulge in all of life’s luxuries, like travel or dining at restaurants, they were free to use some of this excess cash to pay down their debts, stow away in a savings or investment account, and generally improve their overall financial standing. This allowed the lower- and middle-income cohorts to reverse the longstanding trend of a widening wealth gap. 

Unfortunately, this period of rebalancing didn’t last long. Shortly after COVID’s arrival, inflation began a rapid ascent, peaking at a year-over-year rate of 9.1% in June 2022. Since lower-income consumers spend a disproportionate amount on necessities like food, energy, housing, health care and childcare, inflation started to eat into the savings that these folks had accumulated during COVID. By nearly all accounts, those savings have now been depleted for most American families, and so much of the progress made in wealth redistribution is now starting to reverse. It is becoming increasingly clear that the U.S. is reverting back to a two-track economy, characterized by a large pool of stagnant low- to middle-income families and a much smaller pool of wealthy who are doing the lion’s share of the earning, saving and spending. 

Based on the findings of the University of Michigan consumer sentiment survey, those in the lower- and middle-income brackets are far more frequently citing higher prices as a reason for the deterioration of their personal finances. This cohort is also increasingly responsible for the proportion of Americans who are feeling pessimistic about their current conditions and the expectations of their future.

While a more cautious consumer is perhaps what the friendly folks at the Federal Reserve need in order for inflation to return to its 2% target, the dispersion of said caution between the top and the bottom factions is growing wider. By raising interest rates from near zero to 5.5% over a span of 15 months, the cost to borrow has dramatically increased while at the same time the interest received by those with sizeable savings accounts has risen apace. The most recent Fed data for the first quarter of 2024 revealed that the wealthiest 10% of Americans hold over 67% of total U.S. wealth but only hold 13% of total consumer credit. This means that those at the bottom of the wealth totem pole are becoming increasingly dependent on credit cards to afford basic necessities while Americans with plenty of spare cash are getting paid more than they have in decades.

On top of this, the rapid increase of wealth as a result of the bull stock market has been felt almost entirely by the wealthiest Americans. The below chart shows that the wealthiest 10% of Americans own 87% of public equity and mutual fund shares. 

The inability of many in the lower and middle classes to set aside excess earnings to invest in stocks or put away in a high yielding savings account is leading to a quickly growing divide between them and their wealthy counterparts. The below graphs from PEW Research show that the shrinking of the middle class is causing Americans to now be further apart financially than they were in 1970 as the lower income cohorts have struggled to grow their income as much as the rich.

Alan Greenspan, the Chairman of the Federal Reserve from the late 80s to mid 00s, would cite the price of men’s underwear as a gauge of overall consumer health. The thinking was that sales of this basic necessity should remain stable in calm economic environments but fall when men are so strapped for cash, they resort to wearing tattered underpants in order to save a buck. After perusing through the most recent CPI report, I noticed that the “Men’s Furnishings” category, which includes underwear, declined the most in 6 months while the price of men’s suits increased by the fastest in two years! If this theory bears credence, one could speculate that while the upper class is driving up the price of expensive suits, those less fortunate must resort to preserving their past-prime underwear so that they can put food on the table.

It may sound silly or arbitrary to take any sort of signal from it, but if this economic barometer was good enough for one of the most respected Fed Chairs in history, it’s worth taking note. As the health of the U.S. consumer was no laughing matter to Mr. Greenspan, the well-being of our clients is no joke. Our focus is to remain fully invested in a diversified portfolio of high-quality companies that can withstand both good times and bad so that our clients can feel comfortable replacing their worn-down undergarments, no matter the economic climate. Stay safe and stay cool out there!