The End of the Middle Class

The NY Times details:

The recent economic crisis left the median American family in 2010 with no more wealth than in the early 1990s, erasing almost two decades of accumulated prosperity, the Federal Reserve said Monday.

A hypothetical family richer than half the nation’s families and poorer than the other half had a net worth of $77,300 in 2010, compared with $126,400 in 2007, the Fed said. The crash of housing prices directly accounted for three-quarters of the loss.

Families’ income also continued to decline, a trend that predated the crisis but accelerated over the same period. Median family income fell to $45,800 in 2010 from $49,600 in 2007. All figures were adjusted for inflation.

The chart below outlines median family net worth among different percentiles. While all wealth brackets have witnessed a hit since 2007, the wealthier you are... the less you've likely been impacted in percent terms (they were less levered / more diversified in their investments and are less reliant on income from a job for their wealth). Since 2001, it is even more divergent as the only bracket to have seen an increase in wealth are those in the top 10% decile of all wealth.

Source: Federal Reserve

Wealth, Debt, and the Fed

The Federal Reserve released their quarterly Flow of Funds report today, which for a data nerd like me is just about as good as it gets. Unfortunately, not too much to report in terms of change, but I will highlight a few things that I've touched on in the past.

I've shown the data within the first chart a few times. The data is pulled from table D.3. of the report and it shows the cumulative change in outstanding debt by a few private sectors, as well as the federal government. As the private sector deleverages, the public sector has leveraged up in an almost perfect mirror image. The fact that the public sector has leveraged up, has (in my opinion) prevented a debt deflation cycle. My thought is we won't be out of the bag until the private sector is able to leverage back up (like it or not). The good news is we're close.

The next chart from table B.100.e outlines where the average U.S. citizen sits in terms of wealth, shown below in real per capita terms (which puts some perspective on Andrew Schiffs complaint that he can't live a middle class lifestyle on $350,000 / year when the average person is worth about half that). The obvious issue is that we're still only slightly above 2001 wealth levels, having suffered a decline in 2011, despite the unprecedented help by the Fed that has pushed up (or at a minimum supported) asset levels. Also interesting to note that the overall level of real assets per person is only slightly above 2008 levels, while wealth is a bit higher due to the deleveraging done by the average consumer. I would note the other issue of wealth disparity being at or near all time highs likely means that median real per capita wealth is substantially lower.

Source: Federal Reserve

Breaking Out the 0.1%

Greg Mankiw outlines who earns the 0.1% of national income:

Here is an interesting paper that answers the question. Some highlights from Table 3 about the top 0.1 percent:

• 18 percent are financial professionals.
• 42 percent are executives, managers, or supervisors in nonfinancial businesses. More than half of those are in closely-held (presumably often small) businesses.
• 7 percent are lawyers.
• 6 percent are in medicine.
• 3 percent are in arts, media, or sports.
• Less than 1 percent are professors or scientists.

Note that this is only as of 2005 (my guess is financial professional income spiked as a percent of 0.1% of income from 2005 to 2008). It also doesn't show that the 0.1% earned 2.8% of all income in 1979, but 7.3% in 2005, or how much the above figures changed over the years. The latter is outlined below (i.e. the shift to finance was dramatic).

The Rich Get "Slightly Less Baller"

Greg Mankiw points out that we've been forgetting about a demographic that has been hit extra hard by the economic downturn... the rich:

Here is a fact that you might not have heard from the Occupy Wall Street crowd: The incomes at the top of the income distribution have fallen substantially over the past few years.

That's right kids... in 2009, the top 1% of earners made only 13.2x more on average than the rest of the top 50% (i.e. by definition those that are themselves better off than the average), down from a peak of 16.3x in 2007. Ignore the fact that this is still almost twice the level seen in the early 1980's.

I should also point out that the title of his post is "The Rich Get Poorer", so before I sign off why don't we quickly take a look at the definition of poorer:

1. Having little or no wealth and few or no possessions.
2. Lacking in a specified resource or quality: an area poor in timber and coal.
3. Not adequate in quality; inferior.
4. Lacking in value; insufficient.
5. Lacking fertility.
6. Undernourished; lean.
7. Humble.
8. Eliciting or deserving pity; pitiable.

Way to show those Occupy Wall Streeters some perspective!

Source: Tax Foundation

The Evolution of Food Consumption

Illusion of Prosperity presents an interesting chart outlining the stagnation is real per capita restaurant sales over the course of the past decade (hat tip GYSC). I wanted to take a deeper look.

What the below charts outline are real per capita retail sales for food services (i.e. restaurant) and food stores (i.e. food for home). The figures are the result of discounting the nominal retail sales by inflation (the BLS breaks out inflation data for both food at home and food away from home), as well as population growth.

The results...

The overall level of food consumed appears to be relatively sticky (right around $300 / person per month), though overall consumption is down by 5% in real terms since 1992. During that time there has been a sizable shift to eating out, which could mean the decline in real terms has to do with eating "cheaper" fast food.



Breaking out each component, we can clearly see the shift to eating out from 1992 to 2006. Since then, it is pretty amazing to see the drop in both components during the crisis and the subsequent rebound (albeit to levels below the previous peak) since.



While not a surprise, this is rather concerning. I recently outlined that bottom earners have been earning less for the better part of the past 15+ years and it looks like it may be actually impacting the dietary habits of Americans (i.e. eating less [unlikely] or eating cheap / unhealthy food [likely]).

Source: Census, BEA, BLS

We're #7! We're #7!

Zerohedge details:

While the US was #1 10 years ago, due to an abysmal growth rate of only 23%, by far the lowest of all the ranked countries, the US has now dropped from first to seventh, falling behind such countries as Sweden and France.

While the US was in fact still a distant #2 behind Switzerland in 2000 (60% less for the Swiss was $232k / head, while 23% less for the US was $192k), the relative results since 2000 are still rather sobering.



Source: Credit Suisse

After-Tax Income Distribution

The CBO (via Greg Mankiw):

Growth in after-tax income has been uneven across the income distribution, with upper-income groups seeing more rapid growth than lower-income groups. Much of that increase reflects the pattern of before-tax income growth.

This is rather striking... only the top 5% highest earners (and mainly the top 1% earners) have seen their after-tax real income grow at a faster pace than real GDP per capita.

Update:

Adam (a reader) with a key point:

I think the more important conversation, though, is about equality of opportunity, not equality of results. That doesn't lend itself to simple data analysis unfortunately.

Source: CBO

Wealth Rebounds in Q3... Is It Sustainable?

The Federal Reserve released their Flow of Funds Accounts of the United States report (yes, for a data hound such as myself, I am the kid in the candy store reading through it). Bloomberg reports on one aspect, the initial rebound from the larger wealth hole that we need to dig ourselves out of:

Household wealth in the U.S. increased by $2.67 trillion in the third quarter as stock prices and home values climbed, and revised data showed Americans have a larger hurdle to overcome.

Net worth for households and non-profit groups rose to $53.4 trillion from $50.8 trillion the prior quarter, a second consecutive gain, according to the Federal Reserve’s Flow of Funds report today in Washington. Revisions put the loss of wealth between the third quarter of 2007 and the first three months of this year at a record $17.5 trillion, compared with a previous estimate of $13 trillion.

Hey, what's $4.5 trillion amongst friends?

The chart below shows the rebound we have seen since year end 2008. Of interest (to me) is that liabilities have decreased slightly ($157 billion decline over the last 9 months), which may be the beginning signs of much needed deleveraging. More interesting (to me) is that all household assets haven't shared equally (or at all) in the rebound. The rebound has been largely concentrated in liquid financial risk assets (i.e. securities) vs. illiquid tangible risk assets (housing), which have actually continued to decline since the end of the year.



Why is this important? Because it brings up the question as to why these liquid risk assets have rebounded and whether that rebound is sustainable. I personally think it was due to a combination of fundamentals (sustainable) and technicals (questionable sustainability). Fundamentals in that risk assets dislocated in 2008 (i.e. got too cheap and had fundamental value), but a bigger share is due to the technical side of things, namely lots of buying as investors were forced (yes, forced) to take risk to earn anything besides 0%. This can be seen in the shift of personal sector assets below (from table L.10 - page 63).



Note that 2008 did not see a flood of money to savings or money markets (i.e. the flight to quality we have been told occurred), thus this decline is not a reversal of any dislocation. In addition, this ignores the hundreds of billions of dollars that has been poured by taxpayers (via the Fed and Treasury) into banks which also made its way into liquid risk assets during 2009.

In other words, what happens when the technical side of things is no longer a positive? Prices eventually revert back to their fundamental value, which I personally believe are much lower.

Source: Federal Reserve

Wealthiest Americans Rebounding

Forbes details the 400 richest Americans. Venture Beat details the "struggles":

Warren Buffett’s wealth took a dive this past year, losing $10 billion in value on his shares in Berkshire Hathaway. At least he’s not alone. More than three-quarters of Forbes’s annual list of the 400 richest Americans lost wealth in the past year.

But it hasn't been all one direction. Since the stimulus / subsidized financing induced market bounce in March (a point in time which is detailed in March's report on wealthiest individuals on the planet), we see a bounce across the board.



Phew... watching Warren struggle was tough to take.

Source: Forbes

Net Worth = Net Negative over Past Ten Years

Take household net worth, then remove the effects of inflation and population growth to get real net worth per capita.



And this doesn't communicate the widening disparity between the haves and have nots (i.e. the bottom 90% have MUCH less net worth now in real terms than in the recent past).

Source: Federal Reserve (hat tip reader Bryan Keller)

Wealth Concentration in the U.S.

Marketing Charts (via Businessweek) details:

Five towns in California and four on New York’s Long Island have made it into the top 10 wealthiest towns in America, according to a recently released list from BusinessWeek.

The annual rankings of the top 25, which were compiled by The Gadberry Group, are based upon the average 2008 net income and 2008 net worth of the towns’ residents.

Exclusive Brookville, N.Y. tops the list as America’s wealthiest town, with an average annual income of $328K (seventh highest) and an average net worth of $1.67 million, the highest on the list. The non-commerical municipality, which is located on Long Island’s north shore 25 miles from midtown Manhattan, is the home to celebrity Jennifer Lopez and is known for its extreme privacy, country-like setting and good schools.

What struck me was how "little" wealth (I understand it IS A LOT, but I am speaking in relative terms) these families had considering the average income they were making. Bear with me for a minute... the average family in the U.S. makes ~$50,000 and has net wealth in the multiple of 2-4x that (i.e. $100-$200,000) because most of that money NEEDS to be spent to survive. However... if you were making $300,000 a year at the beginning on 2008, chances are you have been doing quite well for yourself for a number of years, thus I would have expected net wealth to have been many multiples higher as you don't "need" to spend all that money to survive. My thought was everyone had to "keep up with the neighbors" (i.e. the Mercedes and private school for the kids).

It will be interesting to see how the wealth in these towns has held up. Businessweek details:

Income and net worth data were collected before the economy collapsed at the end of 2008, and that subsequent news and events indicate that the residents of these affluent communities are most likely now feeling the pain of the recession.

World's Wealthiest Individuals...

Bloomberg (had to quote something from Bloomberg... congrats Mayor, you were the only top 25 representative to have increased your wealth!) reports:

Microsoft Corp. Chairman Bill Gates regained the title of world’s richest person on Forbes magazine’s annual ranking of billionaires worldwide, as the global recession slashed the size of the list by 30 percent.

The number of billionaires fell to 793 from 1,125 last year. It was the first time since 2003 that the number of people on the list decreased, and the biggest drop since the magazine began the ranking 23 years ago.

The total net worth of the list fell to $2.4 trillion from $4.4 trillion last year, with the average billionaire worth $3 billion, down from $3.9 billion. The three wealthiest -- Gates, Berkshire Hathaway Inc. Chairman Warren Buffett and Mexican telecommunications magnate Carlos Slim Helu -- lost a combined $68 billion in the past year.

Source: Forbes

Median Family Net Worth Down ~1/3

Using data from the Survey of Consumer Finances, Baseline Scenario attempts to compute a "composite picture of the median family":

For each asset or liability, I include it if more than 50% of the families in the middle income quintile have it; in that case, I record the median amount held by families who hold that asset. This isn’t the median family, but we might call it a “typical” family.

Click for larger image



What this information shows is:

The weakening of household balance sheets (fewer assets, same liabilities, less net worth, more anxiety) has likely had a significant effect in depressing consumption, which has been the single largest factor in our recent decline in GDP.

Asset Price Declines, Wealth Destruction, and Federal Borrowing / Bailouts

The Federal Government's Flow of Accounts (hat tip Mish) shows a ton of detail related to just how much wealth has been lost in the past 12 months (through the third quarter). Per Mish:

$7.08 Trillion in wealth has vaporized in the past year. Figure 2008 Q4 to be as bad as Q3. If so, roughly $10 Trillion in household wealth will be vaporized in little over a year. And looking ahead, there is no reason to believe the stock market, the housing market, or the economy will show signs of recovery anytime soon.

Detailed below, we see that more has been lost ($7.7 Trillion), looking at just the holding gains / losses on assets over the past 12 months (R.100 Page 113).

Going back to 2004, we can see just how large a drop off this was (note that YTD 2008 we have seen losses across all the asset classes tracked).

Without cheap financing to prop up asset prices above sustainable levels... asset prices fall. Just think about it... home prices have fallen as individuals find it much harder to get a mortgage (if they even want one). A home buyer found it much easier to pay $500,000 for a home with no money down, than with the traditional 20% down.

This is exactly what has happened as corporations, investors, and banks are no longer able to lever their businesses, investments, or balance sheets due to a lack of available financing or losses they were forced to write down. Credit has all, but ceased with the HUGE exception being that for the Federal Government (data from F.1 page 17).

Twenty Highest Paid Towns

We previously detailed that household income increased to $50,233 per Household in 2007. Edward at Credit Writedowns points us to an interesting table that shows where the upper echelon of households live (it will be interesting to see how these California towns were impacted by the housing slowdown in 2008).

Income Inequality in Chart Form...

Why is this the case? A brief post by Will Wilkenson makes a compelling explanation... voters.

Americans who claim to be concerned about income inequality has risen (as income inequality has risen), support for redistributive programs has been more or less constant. What you see instead is increased support for educational reform, suggesting a widespread belief that the problem worth worrying about is the ability of people toward the bottom to gain the skills they need to be successful, not the fact that some small percentage of people are becoming really fantastically rich.

People often wonder why income inequality is so much higher in the U.S. than in other rich liberal democracies. In a nutshell, the preferences of American voters is why.

Source: Census (HT Barry)

Household Income Up / Per Capita Income Down

The Census just released their 'Income, Poverty, and Health Insurance in the U.S.' survey for 2007. To summarize...

Household Income Rises, Poverty Rate Unchanged, Number of Uninsured Down

While household incomes are up after five tough years, per capita income is down. This means more people are living under each roof and earning less, which makes sense given the increase in both unemployment and foreclosures.

More perplexing, per capita income for those of Asian descent dropped an astonishing 4.5%+ in 2007 (though that was off the highest income level in 2006).

More Millionaires in Florida than in New York

Put this in the should have known there was a housing bubble folder; the WSJ Reports:

According to new wealth stats released by the I.R.S. Florida had 199,000 residents with a net worth of $1.5 million or more as of 2004 (their latest period). That topped New York’s count of 168,000, though it still trailed way behind leader California, which boasted 428,000–more than a fifth of the nation’s total.

A little digging into the numbers, however, reveals a troubling trend for the nation’s top millionaire states. Much of the growth came from real estate, which is included in the IRS calculation. About 40% of the net worth of California’s million-and-a-halfers was in real estate in 2004. Florida’s was slightly more than 20%, and New York’s was slightly less than 20%.

But you can bet that with the real-estate slide, California’s and Florida’s million-and-a-halfers will be hit especially hard. And maybe, just maybe, New York will regain its No. 2 spot.

Did the Housing Bubble Hide the (Already Increased) Level of Poverty?

The Brookings Institute takes a look at concentrated working poverty:

The study defines the concentrated working poverty rate as the share of low-income tax filers (those receiving the Earned Income Tax Credit, or EITC) living in communities where at least 40% of all filers receive the EITC.

The report shows that of the 58 large metropolitan areas studied, 34 experienced increased rates of concentrated working poverty between 1999 and 2005. Many of those metro areas, including Rochester, Detroit and Cleveland, are located in older industrial regions in the Midwest and Northeast. Western metropolitan areas, on the other hand, saw a steep drop of 42% in the number of EITC recipients living in high-working-poverty communities.

Please note that the data is somewhat (in fact more than somewhat) stale. However, there are a few things I would like to point out.

• Many of those cities showing a decrease in poverty were in the heart of the subprime fueled housing bubble (think Southern California, Arizona, and Florida)
• Even with that bubble that benefited many poverty stricken cities (enabled housing opportunities / created jobs) ~60% of cities experienced an increase in poverty from 1999-2005
• Most gains directly related to this housing bubble have already reversed
  

Source: Brookings Institute