We’ve run numerous stories discussing the decline of the middle class in the US. Historically, the middle class as we have come to know it was primarily a post-war phenomena. As of late, the group seems to be under increasing pressure, in what Dan Gross calls the "Cram Down decade."
Is it possible that this expansive, home-owning, SUV-driving, plasma-screen watching, internet surfing, day trading, kitchen-renovating, debt laden, cell phone chatting, iPod listening, credit card spending, consumer oriented group was merely a post-war aberration?
I sure as hell hope not . . . but if that is the case, a lot of economic infrastructure — think of each market sector referenced above — is entering a potentially challenging period.
An interesting side note about this is that it is not a uniquely American phenomena: In Great Britain, a similar cram down effect seems to be at play:
"An official government study into Britain’s personal finances reveals a lost generation of 18- to 40-year-olds unable to cope with debts and soaring house prices, with alarmingly low levels of savings and little hope of building a decent pension.
The study, by the Financial Services Authority (FSA) and Bristol University, published today, is the biggest of its kind undertaken in Britain. It paints a picture of a generational divide fuelled by higher education costs and the collapse of company pension schemes – with 42% of adults now with no pension and 70% with no meaningful savings.
Around one-quarter of adults aged 20 to 39 have fallen into financial difficulties over the past five years, compared with 5% of over 60-year-olds, said the report."
What makes this study so fascinating is that this is less a matter of "class warfare" then it is a generational one. The UK study discovered that "24% of young adults are currently overdrawn, compared to 11% of over-50s and just 4% of over 60s."
Its not a function of thrift or industriousness, but rather, its due to "rapidly changing economic and social trends presenting young adults with greater challenges than their parents. Even after lower incomes and limited experience are taken into account those in the 18 to 40 age group are less financially capable than their elders."
In the United States, we see a similar phenomena. Younger people are saving less, and graduating college with more debt. The job market remains difficult, although the silver lining is that the entrepreneurially talented have options oday that did not exist 20 years ago.
At the same time, the number of "American households with a net worth of $1 million or more, excluding their principal residence, grew to a record 8.9 million last year," according to an article in today’s NYT:
"The number of millionaire families rose to 7.1 million in 1999, said Jeanette Luhr, a TNS manager who directed the survey, and then, after the Internet bubble burst, dropped steadily to 5.5 million by 2002. The ranks of millionaire households rose to 6.2 million in 2003 and 8.2 million in 2004, she said.
More than one in seven of the households were in just 13 of the nation’s 3,140 counties, TNS said.
In most large counties, about one household in 12, or about 8.5 percent, was worth $1 million or more, Ms. Luhr said. An exception was Nassau County on Long Island, where millionaire families were more than twice as common, at 17.5 percent of all households.
The households had an average net worth, excluding principal residence, of nearly $2.2 million, of which more than $1.4 million was in liquid, or investable, assets. The survey counted some tax-deferred retirement savings but did not include individual retirement accounts in the liquid assets."
There’s another discussion about how the rich themselves are stratifying: There’s the merely rich, and the uber rich — but that’s an enitrely different issue. Meanwhile, some of the details about the US millionaires are pretty surprising and fascinating:
"The survey found that 29 percent of the millionaire households did not own stocks or bonds and 32 percent did not own mutual funds. One in four had a second mortgage on a home. Half of the heads of millionaire households were 58 or older, Ms. Luhr said, and 45 percent were retired.
Just 18.7 percent of the millionaires own — or owned before they retired — part of a business or professional practice, an indication that high-wage earners who save and invest are the dominate group, at least among those on the lower rungs of the millionaire class.
195 counties had at least 10,000 millionaires and that slightly more than a third of all counties had at least 1,000 millionaires"
Two groups seem to be bearing the brunt of economic change: the middle class, and those who have entered into the work force over the past 20 years place.
Whether this is a temporary phenomenon or a full blown secular change will have a significant impact — on society, on the economy, and on the markets . . .
click for larger table
Sources:
Study reveals financial crisis of the 18-40s
Patrick Collinson
The Guardian, Tuesday March 28, 2006
http://money.guardian.co.uk/news_/story/0,,1741079,00.html
New Rise in Number of Millionaire Families
DAVID CAY JOHNSTON
NYT, March 28, 2006
http://www.nytimes.com/2006/03/28/business/28rich.html
just wait till all those crammed down middle class wonks and lost generation souls are given the social security/medicare/medicaid bills of the retiring rich…HA!
Am I the only one not surprised that older people have more savings, financial aptitiude, and overall wealth than the young? I suspect that in 20 years, people over 60 will still be more affluent than those under 40. Remember, the membership in these groups is dynamic. There’s a 40 year old turning 41 every day…
How bout part of the difference is entitlement. People in their 20’s feel entitled to be a home owner, to have a fancy new iPod, a brand new car, nice clothes, gourmet meals, etc… So much of this “cram down” nonsense is predicated on the assumption that every American has a right to affluence. The “aspirational” consumer has gotten out of hand and so it is personal choice that is leading many young people into financial ruin.
The problem with this is that they were saying exactly the same thing 20 years ago. We were supposed to be a lost generation too. There was all this talk about how much worse we had it than our parents did – “Allentown” and all that rot. We had so much more debt, Reagonomics was going to destroy us, etc. Somehow, 20 years later it worked out.
Yeah, those young adults have all those “challenges” that their parents didn’t have. Somehow, they have to come up with the money for all those necessary items like iPods, high bandwidth internet connections, camera cell phones, hi-def TVs, laptops, and so on. Poor babies.
I wonder if this decline is reponsible for the real estate frenzy. If RE was seen as the last, fleeting hope for wealth then a lot of people may have been duped into buying more than they can afford. In other words, maybe declining wages make bubbles more likely, not to mention lottery ticket sales.
And Tom, back in the bad old days did it take 50% of two incomes just to afford a below average home? I’ll take pricey gadgets and affordable housing over this any day.
A lot of these people with over $1MM liquid have benefitted from one thing: inheritance. Never underestimate the impact of rich people dying.
i cannot help but hold MTV partially responsible.
I can definitely relate to this. I’m 25, graduated from a private school two years ago with a finance degree, and I just can’t get ahead. I can’t buy a home because I have 47k in student loans (no credit card debt), and I now have a kid on the way, and I’m underemployed (or underpaid you pick your favorite term). The economy isn’t looking rosy from my perspective, and I’m not on a coast where RE prices are outrageous.
SO, don’t buy the bs that a lot of people are putting out there about the economy.
BTW Barry, Keep up the fantastic work, it’s not all roses out here. Long time reader first time poster
KC Kid… from the KC metro?
I think the underemployed thing may be an effect of the burst bubble. Those of us who were in the workforce in KC pre-bubble saw huge income increases (20% raises, etc). Those who’ve come in after have seen almost nothing, often less than cost of living. You may be working with some overpaid people that your employer can’t, or doesn’t want to, shake off. I’d imagine in a few years, or when they depart, you’ll see things like your income even out to where they should be.
But a simple word of advice: If you know you’re underpaid, find a new job. The market determines your value.
“The problem with this is that they were saying exactly the same thing 20 years ago.”
the difference of course is the demographic bulge called the boomers…that segment’s size and wealth have driven the cost of many things upward AT THE SAME TIME that 40% of the world’s population wants to become middle class…the 40yr olds and under in the western economies now have to compete on a completely different playing field at the same time that asset prices are at historic highs in those same economies…eventually both labor and asset prices will be arbitraged…but that’s the long run
nothing about this is the same as before…
Eyes Open, Brain Thinking…
Boston is actually in Suffolk county (along with Chelsea, Revere and Winthrop).
Middlesex county is rather larger, covering the cities and towns immediately surrounding Boston to the West, North and South.
Here in Canada 85% of the consumer debt of the last 5 years has been taken on by 45+.
Meanwhile, home ownership in the 35 less has declined. Gen-X just can’t get ahead.
Consumers are spending like maniacs because they don’t realize they are spending their retirement money. Gen-X and Boomers look at the current retirees who are doing fine and think they’ll enjoy the same retirement.
They’re wrong. Today there are 5 workers per retiree and companies and governments are still paying out the promised benefits. But in a little while, this ratio will drop to two workers per retiree and companies are already looking at reducing their liabilities.
When Boomers need cash, they’ll sell the house and realize that the group of buyers out there, Gen-X, is smaller than their group and with no great savings. It’s the first time since the 1930s that the group about to take over is smaller than the one retiring. Not good if you consider that the economy is somewhat of a Ponzi scheme.
And most people don’t realize all of this because the world has become so complex that specialization is rampant and generalists have gotten rare. In other words, our current system is not conducive to having the average Joe see the Big Picture despite having a University degree!
It doesn’t help that we’ve just gone through a few decades of good times; hardship has become unfathomable.
Overall, an interesting post. A few comments:
1. It is interesting that LA County has the largest number of millionaires, even larger than the O.C., something I would not have thought true. However, the “net worth of over $1 million excluding principal residence” statistic is completely bogus. Given what house prices in California are like, if you bought a normal middle class house a few years ago in a reasonably decent neighborhood, all you have to do to join the “net worth of over $1 million excluding principal residence” club is take out a big, honkin’ mortgage. On the other had, if you act responsibly and pay down your mortgage, you are not a “millionaire” according to these people. Of course, out of control housing inflation has made a complete hash of net worth and the whole “millionaire” concept.
2. If you are a young person who is trying to get ahead, I would suggest the following:
First you should read two books:
(a) “The Millionaire Next Door,” by Thomas J. Stanley and William Danko, and
(b) “Rich Dad, Poor Dad,” by Robert T. Kiyosaki.
“The Millionaire Next Door” will reorient your thinking about what constitutes financial success, and who is or is not successful. Some of the suggestions about what to invest in contained in “Rich Dad, Poor Dad” are too risky for my taste, but the basic ideas in the book, especially the discussion about what is an asset and what is a liability, are extremely valuable and will reorient your thinking about how to achieve financial success.
Once you read these books, you can then go about educating yourself specifically about how to manage income, spending, savings and investment to redirect your spending and resources from consumption to wealth accumulation.
You cannot control the circumtances you were born into, or what generation you are a member of. In the short run, you cannot control your educational background or employment prospects (although over a number of years, you can). What you can control are your spending and consumption. Fortunately, what you spend your income on, and not the amount of your income, is what determines whether you become rich or poor (although I certainly don’t deny that having a good income helps).
Even better than Rich Dad, Poor Dad is “The Total Money Makeover” by Dave Ramsey. The 20-somethings who read that and act on it can have $1m by the time they’re 40. Ramsey’s baby steps described in the book basically boil down to being debt-free, investing every month for retirement, and avoiding buying more house than you can afford. For motivation along the way, podcasts of his daily call-in show are free (via iTunes or his Web site at http://www.daveramsey.com). I’m 28 and don’t feel strapped at all.
Chad,
I’m in tx, but I’m moving back to KC in August. The wage situation, and job outlook are stronger there for me than they are in Dallas-Fort Worth. And on the job front, I have been looking for a long time (it’s hard to get calls back in Texas when you last name is Hernandez).
D: Canada is going to be fine. You have a small population and lots of resources left to sell.
The US is another issue. Two problems: 1.) I know the statistics don’t technically show it, but young people are faced with significantly higher costs of living than their grandparents and parents. For example: Pensions used to be employer paid. Now you have a 401k you have to mostly fund yourself, straight out of your salary. The same is true of health care payments. 2.) Our parents and grandparents made a lot of sacrifices when they were young, which eventually helped them accumulate assets. Nobody has time for that anymore, they just want everything now, paid for with debt if need be. And speaking from experience, once you get on that debt treadmill…
Generational cycles… according to “Generations”, those 20-30s now will be our next lost generation…. I’ve got leading edge millenials up and coming – hopefully they can come through this ok….
Taking out a mortgage on your home wouldn’t increase your net worth; the proceeds and the debt would cancel. Something like 20% of homeowners in LA own their home outright though, and they could build up assets fast. A lot of this is the entertainment industry and real estate investments.
What surprises me is how low New York is.
Posted by: KirkH | Mar 28, 2006 9:26:40 AM:
“And Tom, back in the bad old days did it take 50% of two incomes just to afford a below average home? I’ll take pricey gadgets and affordable housing over this any day.”
No, Kirk. In the 1950’sand 1960’s it took about 15% of a single income family to pay the PITI. That number jumped to about 31% of a two-income family in the recession of 1991-1994. If it is 50%, then blame the bank underwriters for ignoring the ratios when approving loans. (or believing “stated incomes”)
“How bout part of the difference is entitlement.”
This is CRAP. As if a whole generation isn’t getting up and going to work everyday. Entitlement is when you could drop out of high school, work in a factory, have your wife stay home and raise the kids, and still live a middle class life. Face it, real wages have been stagnant for 30 years. The job market is lousy even for the skilled and educated workers.
Women working has led to housing inflation since they merely lowered men’s effective wages. It took a lot of inflating just to maintain those stagnant real wages. C’est la vie.
Actually having a large percentage of the female population not working was a historical aberration.
Apart from the current run up in home prices, why is that people think they cant afford a house as a genreation. You pay for what you can afford, there is no rule that you must live in a such and such neighborhood.
You live where your finances allow, if that means in a lower income neighborhood well so be it. Real people live there too. If you live within your budget, and not your imaginary lifestyle choice, you can own a home.
anything above your means is a fantasy for the time being until you have the money.
I`ve rented in poor neighborhoods when i was poor.
Now that i`m doing better i live in a higher priced part of town.
I think there is a disconnect between what people can afford and their imagination or fantasy of what they deserve.
I find it striking that the article on millionaires never for a second pauses to consider the effect of inflation on the number of alleged millionaires. Due to our debt commitments, the Federal Reserve has been on a money printing binge of historic proportions. The world is being flooded with dollars. This flood of dollars is fueling the Chinese boom, stock market prices, real estate, but it is also skewing the perception of actual wealth. I have no numbers to back this up, but from personal spending habits over the last 4-5 years I feel as if my dollars today stretch half as far as they did in the late 90s. In other words, my gut tells me the dollar has dropped 40-50% in value in the last few years alone and will fall further since our debt obligations are essentially out of control. So I take this study of the quantitative number of millionaires with more than a few grains of salt. In a few more years, the ‘number’ of millionares could well be 50% of the population… in Weimar dollars. I don’t see it as anything but a measure of inflation. And it’s scary.
Where do you people work?
I’m a special educator. I make $65k a year teaching 2nd grade special needs children. I pay $20 a month for my health coverage and it’s outstanding. Also, I when I put into my 401k my employer pays half. I’m going to retire at 55 years old. And finally, I own a summer business that generates good income. We teachers do have summers off.
And people laugh at me when I tell them that I teach at the elementary level. =)
In researching investing, I regularly come across the term swing trading. Is there any merit in it, or is it just the latest fad?