Saturday, December 8, 2007

Do the Bottom 80% of Americans Stand a Chance?

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While I could devote an entire blog to the long term direction of the country, I want to focus on some long term trends that I think are behind many of the issues facing the markets today. While at times "Wall Street" and "Main Street" disassociate, that cannot go on forever.

In a Minyanville.com article, touching on Friday's BS labor report... oops, I mean BLS labor report, we note
  • Average hourly wages among production and nonsupervisory workers (which make up about four-fifths of the work force) rose 8 cents, to $17.63, but that put wage growth only slightly ahead of inflation.
  • Adjusted for inflation, wages have fallen over the last year, from roughly $17.69 last November. And over the past four years, the inflation-adjusted hourly wage has risen by just a penny, from $17.62 in November 2003.
I did double check the facts and I see from the government's own website, wages for these people were $14.97 in 2002 and now are $17.63 or a 3.3% yearly increase... I went back 5 years instead of 4 to make it nice and clean (half a decade).

Why do you care? I personally think most of us active in the 'investor' class (if you will) tend to marginalize what is going on in the real world. Most in the 'investor' class tend to associate mostly with others in this class - and we miss out on the plight of the vast majority of Americans. I think this is especially true of Wall Street, which is full of the "upper 0.5%" types. Do you realize what $17.64 is on an annualized basis? $36,691. That's the 'average' guy on the street.... Main, not Wall. So let's focus on what is really happening on Main Street.

First, if you believe the inflation figures from the government, essentially for the past half decade people (by people I mean the lower 80% of Americans) are (after inflation) making no progress on their wages. They are treading water. That's if you believe the bunk in the inflation figures.

If however, you are like me and you believe reality [Bloomberg Finally Seeing the Truth on CPI], inflation is far higher than people are really falling behind.
  • Since 2001, health premiums have risen 78%; Wages have gained 19% over the same period. CPI inflation measure? 17%.
  • Housing is the single-largest expense for most Americans -- as much as a third of total cash outlays. During the housing boom, OFHEO had housing prices increasing 13% per year; Non-government foundations had real estate taxes increasing about 6%; Over the same period, BLS measured ‘housing cost increases’ at 4% -- about half of its actual price increases.
  • Median real-estate taxes on owner-occupied housing went from $1,614 in 2005 to $1,742 in 2006, an increase of 7.93%. (That's more than double CPI inflation rate)
I am trying to think of a typical American's budget, from highest expenditure to lowest. The order would be something like (1) roof over head (2) taxes for roof over head if not a renter (3) grocery + restaurant (i.e. food expense) (4) insurances - health, home, car (5) car expense (payment + gas) (6) utilities - heating, electric, phone, internet, cable (7) clothing/discretionary

Those with kids would probably have a bit of a different expense weighting, but that in general should some it up. So if 80% of Americans can be classified as "production and non supervisory", and 60% of all Americans own a home (a very consistent figure for a long time), than many of these people are homeowners. The government tells us inflation is rising 2-3% (at worst) Any of you living in the real world know (going back to the list above)
  1. Roof over head - if you are a homeowner in the most populous state, many homes have risen in value from 50-100% in the past 5 years, far higher than 2-3% a year. Those who are renters have faired better, but in general rents are going higher than 2-3% a year. So as prices were increased on homes to unsustainable levels people were forced (in the past half decade) to buy inflated assets that sucked up a huge amount of their monthly budget.
  2. Taxes for roof - this applies only to homeowners but in general as go prices, so go home taxes
  3. Food prices - while generally keeping up with inflation (or even below) earlier in the decade the past 2 years have seen sharp rises - we have outlined these in the blog, one example [Tyson Foods Continues to Point to Food Inflation]. While coming to an exact figure is difficult because this is a basket of goods and everyone buys a different basket, >10% increases in meats, poultry, dairy, etc are the 'norm' the past 24 months. A bit higher than 2-3% inflation.
  4. Insurances - not only are insurance premium rising, a greater share is being pushed off from corporations to employees. If this is right or wrong is another debate, but if premiums rise 7% a year but this year an employer decides to only foot 45% of the bill instead of 52%, you get a much higher increase than 7%. And people in large population states will know home insurance has risen through the roof due to adverse weather of past half decade. So this is generally much higher than 2-3% a year.
  5. Car prices in general have been slowly growing so I will concede new cars (due to extreme competition) are seeing price increase in line with overall 2-3% gov't inflation estimates. Gas? A whole different story. It seems like a different eon but even in 2003 gas was roughly $1.30. To reach the average $2.90-$3.00 today we are talking 100% + inflation over the past half decade.
  6. Utilities - needless to say anyone heating their home not using natural gas are seeing tremendous increases in their heating/air conditioning bills. In general people are paying more (through choice) for internet service (broadband in general is double the cost of what dial up used to be), and anyone with a cable provider sees these prices increase more than 2-3% a year.
So those are the main components of life. Yes, many discretionary items such as electronics get cheaper every year and/or for the same amount of money you get a lot more powerful product - but those are items at the tail end of a budget - not the items you 'must have' (roof, food, transportation). Also please keep in mind in the "very long term", Americans are now being asked to save for themselves for retirement. Before corporations were more involved (rightly or wrongly) with pensions. Now, 401ks are the game of the day. So with all the items above, one must also devote to 'self saving' for retirement, since there will be little to nothing there from other sources (certainly for most of us under 40 years old). So some income needs to go to that area, whereas a decade ago, that was far less of a consideration. However if the average non production/non supervisory worker is making $37,000 how is he/she saving for retirement? Even those making $60,000 will be having difficulties in our 'consumption culture' where everyone must have a HDTV as an American right of birth. I am now reading how 401k withdrawels in the past 6 months are reaching the highest levels seen. Why? People will tap every source of income they can now that the house ATM is gone. You don't think this has terrible long term consequences?

One of my main arguments has been with the explosion of home equity withdrawals the past half decade, people who are otherwise struggling, have been able to maintain their living standards and mask their growing expenses (growing at far higher rate than government 'reports'). Most of America *is* falling behind. And with the first nationwide decrease (ever) in home values, the gig is up. If income inequality is good or bad can be debated for days, but facts are facts [NYT: Income Gap is Widening]
  • Income inequality grew significantly in 2005, with the top 1 percent of Americans — those with incomes that year of more than $348,000 — receiving their largest share of national income since 1928, analysis of newly released tax data shows.
  • The top 10 percent, roughly those earning more than $100,000, also reached a level of income share not seen since before the Depression.
  • While total reported income in the United States increased almost 9 percent in 2005, the most recent year for which such data is available, average incomes for those in the bottom 90 percent dipped slightly compared with the year before, dropping $172, or 0.6 percent. The gains went largely to the top 1 percent, whose incomes rose to an average of more than $1.1 million each, an increase of more than $139,000, or about 14 percent.
  • The new data also shows that the top 300,000 Americans collectively enjoyed almost as much income as the bottom 150 million Americans. Per person, the top group received 440 times as much as the average person in the bottom half earned, nearly doubling the gap from 1980.
  • The top 1 percent received 21.8 percent of all reported income in 2005, up significantly from 19.8 percent the year before and more than double their share of income in 1980. The peak was in 1928, when the top 1 percent reported 23.9 percent of all income.
Again this is not meant to be a political debate. If one believes in trickle down economics than "eventually" gains seen in the top should 'trickle down' to everyone else. Evidence seems to be mounting against this. But I want to focus on the facts. The 'consumerism' in America relies on the majority - not the top 1%. If one believes having income distribution strata similar to seen right before the Great Depression is a healthy path, than America has not been this 'healthy' in close to 8 decades. I think this lack of wage growth speaks to a greater trend of income 'equality' for the 'working class' across the globe - this, I argue, means great things for 'human kind' as people across the globe move to more of a global mean income. [This is already happening in the 'upper class' as a [Global millionaire Boom] has started, so why would it not happen on the bottom end as well?] But it portends very bad things for those, in the working class, who have enjoyed well above average wages in the past, as reversion to the mean simply means those above the mean, get driven down to the global wage, and those below the mean, get drive up to the global wage. I don't think it is right to argue that globalization is 'bad' or 'good' - it has good and bad components for each participant. However, having no policies in place for the many Americans who are being 'dislocated' by this global force is a mistake. And to ignore their plight is quite a sad development.

These forces are why people sit and scratch their head and say, look US GDP growth is roaring, we are having great time in aggregate - I have no idea why the average American is feeling so uneasy the past half decade - if you look at the 'numbers' they should be feeling great. But to look at the 'macro' without looking at the 'micro' leads to incorrect assumptions. Much like erosion, these trends happen incrementally, and over long periods of time - you don't wake up one day and feel 9% poorer - hence it is not so noticeable. Until you step back and look at it over a 5 year, or 10 year period. And then the writing is on the wall. Unless wages start rising in a massive manner in the US for the lower 80%, I just don't see where the reversal is....

Again, I keep hearing 4.5% of GDP is due to housing... a very easy term to throw around. I'd argue a whole class of people have been keeping their head above water due to an asset (their homes) inflated to unsustainable levels - this allowed them to extract equity to live their lifestyle - as their costs increases at levels 2-3x their wage gains. Now that this game is over - what does 2008-2009 portend for the "80%"?

I think this 'bailout' is just step 1... much much more than 4.5% of GDP is reliant on home prices remaining at inflated prices. This will be an interesting time - watching politicos do everything in their power from stopping the free market from working, and keeping asset prices that much of our consumerism is reliant on from dropping much further.... all with a background of growing worldwide shortages [A World of Shortages]- and hence sustainable inflation, whatever the Fed does or not do. I know I sound like a dismal scientist, and quite the downer - but I just find it hard to see the US not seeing a major slowdown in the year ahead. The tech bubble, while painful for the investor class and pieces of the 'working class' who started buying tech mutual funds in their 401k was one thing. The equivalent of a tech bubble in the real estate market which impacts much more of the people is a whole different animal. Forget Iraq, the economy will BE the end all and be all issue for the 2008 presidential election.


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