Gap Between Rich and Poor in U.S. Widens at Alarming Pace

A Bureau of Labor Statistics report released last week showed that, of working Americans, 7.2% earned so little that they were classified as living in poverty. This was the highest level in two decades for this measure. In 1999, this statistic was below five percent.

Top income earners saw their wages increase seven percent between the middle of 2009 and the first quarter of 2012, buoying their consumer spending habits.

Low income earners saw their wages rise only 2.5% during the same period (source: Wall Street Journal, April 18, 2012), dampening their consumer spending habits.

Adjusted for inflation, the income gain of 2.5% does not even cover inflation, as reported by the Consumer Price Index (CPI). This is why more working Americans are living in poverty and why consumer spending is so weak.

Between 1979 and 1989, incomes for top earners increased 75%, but incomes for the bottom fared better relative to today, as they increased 54%. This is why consumer spending was so robust back then and why the economic recovery gained traction during this period: wealth was shared and more evenly distributed.

As revealed by statistics during the last decade, the gap between incomes for the top earners as compared to the bottom earners continues to widen, which explains why consumer spending is so weak. Part of this widening gap can be explained by those with an education having a better chance at higher salaries.

There is also the fact that technology has made previously good-paying jobs obsolete. Furthermore, the high-paying manufacturing jobs have all migrated overseas, especially China, sending consumer spending along with it.

As I have been arguing, the latest U.S. job numbers have continued to show strength in low-paying jobs, which does not bode well for consumer spending and the economic recovery.

Wells Fargo Securities has conducted a study that showcased the fact that, in the last two years, 40% of all the jobs created have been low-paying jobs, which leaves little room for consumer spending and is not a sign of a healthy economic recovery.

The Wells Fargo study goes further to illustrate that middle-income jobs, which employ 40% of all workers in this country, have been very poor over the last two years. These are the administrative roles, bank tellers, machine operators, and mechanics whose jobs disappeared with the financial crisis of 2008 and have yet to return, along with their consumer spending.

So if the top earners are doing well and jobs are being created on the low end for less money, while unemployment among the middle-income continues to be high, then this would explain why real disposable income continues to fall with this economic recovery.

With real disposable income declining, it is no wonder that consumer spending over the last two years has grown at the slowest pace of any expansion in the post-World War II era (source: Bloomberg, April 11, 2012). (See: Pathetic Job Numbers Expose “Fake” Economic Recovery.)

In the first quarter of 2012, the low income earners’ average paycheck was $360.00, while the top income earners’ average paycheck was $1,858.00. Couple this with the fact that unemployment among the middle-income earners continues to be poor and it is hard to picture a robust economic recovery with strong consumer spending.

Watch out for that stock market rally, dear reader; it acts if the economic recovery and consumer spending will pick-up steam—highly unlikely when growth in consumer spending has been at the lowest pace in decades!

Has America gone from “too-big-to-fail” to “too-small-to-survive?”

Where the Market Stands; Where it’s Headed:

Stuck on 13,000…that’s where the Dow Jones Industrial Average has been now for five weeks. The world’s most watched stock market index trades either a few points above or below the 13,000 level with no decisive action either way.

Yes, the stock market has come a long way from March 2009, fuelled in my opinion by increasing government debt and an aggressively expanding money supply. I believe the market is putting in a huge top at this point. (Also see: Proof Stock Market Rally’s Just an Old-fashioned Bear Market Trap.)

What He Said:

“We will wish Greenspan never brought rates down so low as to entice so many consumers to have such big mortgages.” Michael Lombardi in PROFIT CONFIDENTIAL, April 27, 2004. Michael first started warning about the negative repercussions of Greenspan’s low-interest rate-policy when the Fed first dropped interest rates to one percent in 2004.