The old cliche “the rich get richer and the poor stay poor” isn’t wrong, but it is incomplete. As it turns out, the middle class is getting poorer.
That’s the word from the Pew Research Center’s analysis of recent data from the U.S. Census Bureau, anyway, that concluded that the portion of all wages earned in America by the middle class has slumped from 62% to 43% since 1971.
That money isn’t being redirected to the lower class earners either: They’re still pocketing the same 9% of earned income they were seeing nearly 50 years ago.
It’s the upper class making (relatively) more now. Where the rich earned 29% of all wages paid in the U.S. in 1971, now they lay claim to 49% of all money earned.
In that light, one can’t help but wonder if the people behind 2012’s Occupy Wall Street were on to something about the so-called wealthiest one percent.
And it’s not as if the trend is poised to reverse course anytime soon. Between the rising cost of healthcare, groceries and education, discretionary/disposable income has withered away faster than the middle class’ portion of the total income earned in the United States.
Who Loses When the Middle Class Goes Away?
Some business can weather a temporary economic lull … but this isn’t temporary.
The shrinking net incomes of the middle class are taking a toll on all sorts of industries, including the obvious ones like retail, but also the less obvious ones like life insurers, fashion brands and brokerage firms.
As evidence of this growing desperation, one only has to look at the recent tactic Metlife (MET) employed of installing kiosks in Walmart (WMT) stores as a means of reaching the important middle class customer it’s seeing less and less of.
It’s not just something Metlife is imagining either: The proportion of households that are covered by any degree of life insurance has fallen from 30% to less than 20% over the course of the past 30 years.
Then again, Walmart may not even be able to bring middle class customers to Metlife the way it used to.
It seems an unusual idea, but for some items, even Walmart isn’t the low-price leader; and even where it is, its previous middle class customers may simply be visiting the store less.
WMT’s recent growth has been rather stagnant despite respectable turnaround efforts, which may tacitly indicate a decent-sized sliver of its target demographic has slipped away, if only in terms of the total number of visits and dollars spent at its stores.
The vanishing middle class has also taken a toll on some companies investors wouldn’t suspect at first. Although, with a little thought, their strengthening headwind makes sense.
Ralph Lauren (RL) is one of them.
Although Ralph Lauren remains profitable and is driving sales growth, it’s been lackluster progress. It’s an idea that comes as a surprise, in that Polo and Ralph Lauren names are brands lumped into the “luxury” category … at least in investors’ minds.
In reality, Ralph Lauren is pseudo-luxury, best fitting into a category deemed “aspirational,” meaning it was a preferred brand that mostly appealed to the middle and even lower class consumer that was aiming to align their look with an attention-getting brand name.
Even that logic is being crimped by budget realities, as value — out of necessity — is forcing some shoppers to rethink purchased they may have made just a few years ago.
That’s not to say there aren’t winners in the midst of this transition. There are. They’re just fewer in number.
It’s not a matter of displaced or redirected spending dollars. It’s simply a matter of fewer consumer dollars.
That plays right into the hands of names like Family Dollar (FDO) and Dollar General (DG), both of whom sensed this opportunity and pulled the trigger on an effort to expand and beef up their traffic-driving efforts to keep the lower-end customer coming back, while also drawing some of the middle class demographic they weren’t drawing before fiscal push came to shove.
In fact, these stores are doing so well, they’re even reaching into the upper tier of the middle class.
A 2012 study done by McKinsey found that a respectable 14% of those U.S. consumers earning more than $75,000 per year were spending more at stores like Family Dollar and Dollar General, while spending less at other retailers. $75,000 per year isn’t what it used to be.
The Last Word
Looking to the future, expect more of the same. That is, though the Dow Jones Industrial Average may be pushing higher, the so-called Doug Jones Index that syndicated columnist Jim Hightower refers to (as a barometer for how the average man on the street is feeling) is slowly sinking.
And the conditions that are widening the disparity are nowhere near being unwound. The challenge for investors about how to best play the demise of the middle class is thinking in generational terms, rather than just thinking about next quarter’s results.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.