The 5-year mark: Some analysts see a new 'hourglass' figure in U.S. economy
This article first appeared in the St. Louis Beacon, Sept. 16, 2013: Marketing analysts and consultants are talking a lot these days about the U.S. economy’s new hour-glass figure: Heavy on top and bottom; trimmer in the middle.
Five years after the financial meltdown of 2008, grocers, retailers and large corporations, such as Procter & Gamble and Starbucks, have adopted strategies that target consumers at the top and bottom of the socio-economic ladder, rather than relying on the middle class to drive sales.
• At a national conference of advertisers in 2011, Stephen Quinn, a Wal-Mart executive, discussed the challenges facing the retailer in an "hourglass economy" created from the "hollowing out of the middle class.”
“Things are fundamentally different, and permanently different, with the U.S. economy and the U.S. consumer,” he said, according to a report in The New York Times.
• A January analysis published by the trade publication Progressive Grocer also noted the shift: “The new normal looks more like an hourglass, with expanding markets for affluent and value-seeking consumers and a shrinking middle class with a shrinking budget for food. With wallets tightening and competitive pressures intensifying, how can you gain a stronger foothold with growing consumer markets at either end of the hourglass?”
Who coined the term?
Citigroup is often credited with first recognizing the hourglass phenomenon as it relates to consumption when it began urging investors in late 2009 to consider companies that target high-income or low-income consumers: Saks at the top of the hourglass; Family Dollar Stores at the bottom. And The Wall Street Journal sparked wide discussion on the trend with a 2011 story about Procter & Gamble that explained how the corporate giant was changing its product development and marketing because middle-class consumers were "trading down” to lower priced goods.
But some sociologists and economists were using the hourglass metaphor long before the Great Recession ramped up after the financial meltdown in the fall of 2008. A conference titled "Economic Inequality and the Hourglass Economy,” held at DePaul University in Chicago in April 2008, brought together sociologists and economists who were studying changing wealth distribution and its impact on the declining middle class.
Steve Fazzari, an economics professor at Washington University, said that when applied to U.S. income, the hourglass describes a trend that began several decades ago with stagnating earnings for middle-class Americans.
"The hourglass is a little misleading; there are still lots more people in the middle, but in a relative sense we’re moving in the hourglass direction. The middle tends to be shrinking,” he said.
For marketers, the hourglass metaphor relates to the realities of consumption: The financial struggles of middle-class Americans have impacted their buying power.
Before the Great Recession, buying power was shored up with credit; Americans were able to maintain a certain standard of living by taking on more debt, Fazzari said. But the recession curtailed excessive borrowing and spending.
"A lot of the reason we’re seeing the stagnant economy is that we don’t have that consumption from the middle class,” he said.
The bottom 99 percent
The unevenness of the nation’s economic recovery has been documented in various studies.
A report published by Pew Research in April found that from 2009 to 2011, the mean net worth of the upper 7 percent of U.S. households rose by about 28 percent, while the worth of households in the lower 93 percent dropped by 4 percent.
Pew noted that the variance was fueled by the rebound of the stock and bond markets, while the housing market remained flat. Less affluent households tend to concentrate their wealth in their homes.
Related to wealth is the issue of growing income disparity. According to new findings by economist Emmanuel Saez, the income inequality gap has continued to widen in the wake of the recession.
Saez, a professor of economics at the University of California-Berkeley, is known for his research on income distribution in the United States. He recently released an update of his study "Striking it Richer: The Evolution of Top Incomes in the United States,”which is based on income tax data and Census Bureau statistics.
Among his findings:
• In 2012, 50.4 percent of all income earned in the U.S. went to the top 10 percent of earners. That share was larger than it was in 1928, the height of the "Roaring '20s." (The stock market bubble burst a year later, spurring the Great Depression.)
• Digging deeper, Saez found that top 1 percent of earners captured more than one-fifth of all U.S. income.
• About 95 percent of all the economic gains made in the U.S. from 2009 to 2012 -- the first three years of the recovery -- went to the top 1 percent of incomes.
• Saez concluded that while the incomes of the top 1 percent are nearing complete recovery, the bottom 99 percent have "hardly started" to recover.
The circle of life
Fazzari, who teaches a class on the American Dream at Washington University, said that, without faster income growth distributed broadly across the economy, it continues to be difficult to get a robust recovery going.
Contributing to the malaise is meager job growth, he said. And that discussion leads back to spending by U.S. consumers, which, in turn, drives production.
"We had consumption growth from the middle class in the years leading up to the Great Recession, but it was financed in an unsustainable way,” Fazzari said. "Their incomes weren’t growing quickly, but they spent a lot and ended up using the house as a piggybank, among other things. That’s over, and we can’t get the traction we need to get the economy going. People talk about quantitative easing and government stimulus, but none of these things is addressing that deeper root cause: How can we generate demand to get the economy at full employment when income growth is so meager across so much of the distribution?”
The 5-year mark: Snapshots of the recovery
This is the first in a series of economic snapshots focusing on where the U.S. economy stands five years after the meltdown of some of the nation’s largest financial institutions.
To learn more, check out this Washington Post graphic that summarizes the major events of that harrowing week in September 2008.