The Middle Class Is Shrinking... And That's Good News

By Bob Reby, CFP^®, September 7, 2018

Where did the Summer of 2018 go? School buses abound as we approach Fall. The arrival of Fall brings with it an array of anniversaries in the economic world. Looking back at these events helps put in perspective where we were then, where we are now and where we may be going.

On Friday, September 12th, 2008, the S&P 500 index closed at 1251.70* compared to this writing when it’s at 2,896.53. We were already entering bear market territory (20% decline from the peak 11 months earlier), even before Lehman Brothers filed the largest bankruptcy petition in U.S. history at that point in time.

The following day AIG, one of the largest insurance companies on the planet, failed. The federal government subsequently bailed them out to the tune of about $182 billion.* This, among other catastrophic events, set in motion the global credit crisis and the great recession as we know it. We saw the S&P 500 decline 57% from its peak in October 2007 and unemployment peak at 10%. In addition, the Federal Reserve reported household net worth declined 25% during the financial crisis.

Fast forward to present day, the Federal Reserve reports that Americans’ household net worth is 50% higher than its pre-crisis peak. In addition, U.S. household debt, as a percentage of total assets, is at a 30-year low. The brutal part is that as U.S. households worked hard to deleverage and create healthier balance sheets for their families, the Federal Government accelerated their borrowing.

Additionally, unemployment has declined from 10% to less than 4%, corporate earnings are strong, and inflation seems moderate. Now back to the American household. Stephen Rose, of the Urban Institute, created a study using Government data. Between 1979 and 2014, the percentage of poor Americans dropped from 24 to 17. The percentage of middle class Americans shrank from 32 to 30. Where did they go? Many ended up in the upper middle class ($100,000-$350,000) which grew from 13% to 30% of the population. The upper class also grew from .1% to 2%, according to the study.**

The “shrinking middle class” has often been a point of discussion in the media. However, they have put it in a negative light. While they are correct, the middle class has indeed shrunk, it is because so many Americans are becoming more affluent! I hope you have a chance to read Stephen Rose’s study.

So where does all this leave us? Well, accelerating global affluence is here to stay and not just for Americans. This is a long-term trend that cannot be stopped; although it might periodically stall as recessions come and go. Healthier family net worth statements allow for more consumerism and more opportunity for those seeking it.

I look forward to receiving any feedback you are willing to share.

^{*Nick Murray Interactive, September 2018
**https://www.urban.org/research/publication/growing-size-and-incomes-upper-middle-class/view/full_report}