TRAVERSE CITY — Recently I watched “Inequality for All,” a documentary starring former labor secretary and UC Berkeley professor Robert Reich.
In the spirit of Al Gore’s famous movie “An Inconvenient Truth,” Reich presented charts galore that pointed to correlations between income inequality and the overall health of the US economy.
Researchers from UC Berkeley have now updated their study of US household income through 2012. Their early findings point to an ever-widening gap between the segment of households with earnings above and below a threshold of $114,000 per year.
Focusing on this particular income line helps to avoid the heated debate centered on the controversial “We are the 99 percent” slogan of the Occupy Wall Street movement. Perhaps surprisingly to some, the $114,000 income level marks the dividing line between the top 10 percent and the bottom 90 percent of all households.
Their findings show the current economic recovery to be one of the most uneven in recent history. Since the recovery’s start five years ago, the top 10 percent of earning households now capture slightly more than 50 percent of all income earned. This measure now sits at a level not seen since 1917.
With the median household income — adjusted for inflation — stuck at the same level as 1989, a recent Census Bureau report adds to a growing body of evidence pointing to a middle-class feeling squeezed from multiple angles. In many ways, these findings validate an intuitive feeling many have today.
After reviewing a sampling of the most recent reports from retailers, including Wal-Mart, the likely causes of weak spending trends for middle-income consumers appear increasingly obvious. For its US stores opened at least one year, Wal-Mart has now reported back-to-back quarters of sales declines and they cite tight consumer finances in their projection of “relatively flat” sales growth for the current quarter.
Recent national jobs reports provide similar evidence of financial pressure being applied to middle-income workers. While job growth has been just strong enough to absorb the natural growth in the labor pool, the quality of that growth has been weak with the uptick in part-time jobs and the largest gains occurring in lower-wage areas.
While very complex and long-term in nature, these trends do act to create a less-than-solid foundation for investors.
From an investment strategy perspective, having an awareness of the potential economic fault lines and the underlying sources of weak confidence is often more than half the battle. Much of the other half is having the courage to stand behind your convictions to achieve the dual investment goals of portfolio protection in the pursuit of profits.
Jason P. Tank is a Chartered Financial Analyst and co-owner of Front Street Wealth Management, a fee-only wealth advisory firm located in Traverse City. He encourages questions and comments about future columns. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com