Why Are the Poor Spending More Than the Middle Class?
Why are the poor spending more than the middle class? Between 2007-2009, spending by the poor rose 5.6%. Meanwhile, spending by the middle class has declined. In 2008, spending went down 3.1% from 2007. In 2009, spending went down another 3.5% from 2008.
Making the point in dramatic fashion, the October 6th Wall Street Journal published an article with this headline:
Before we focus on the middle class, let's recognize the dilemma faced by the poorest Americans. Their after-tax income has, in fact, declined by 5.5% to around $9,956. So why the rise in spending? It seems that necessities like food, rent and utilities have gone up. Increased funding for food stamps may help here, but the numbers tell us that the poor are facing a tough road ahead - especially if food price increases escalate as some are predicting.
Combine this with recent increases in "households with very low food security" and we may soon face a dramatically growing social crisis. USDA statistics show these "households with very low food security" increasing from 3.5% to 4.1% of total households for the years 2003-2007 (the latest statistics available). The definition of "very low food security" is households "in which food intake of one or more household members was reduced and normal eating patterns disrupted due to inadequate resources for food." Since the financial crisis and recent recession began in 2007, it's reasonable to suspect the numbers have deteriorated since then.
As for the middle class, their situation is less dire. It's not that middle class families don't feel the pinch of rising food prices. They do, but they simply have (by definition) more discretionary spending - more money to spend on items besides food and other necessities. So they conceivably aren't facing hunger as may be the case for increasing numbers of poor.
Still, the news isn't good for the economy as a whole. Logically, if total spending by the middle class goes down, and the percent of spending on necessities (food, rent, utilities - and let's not forget health care) goes up (it's up for everyone, not just the poor), what's left for everything else? Add in high unemployment, and the beginnings of a general trend toward saving rather than spending, and it's hard to see how and when economic activity will pick up anytime soon.
So the poor are pressed to spend more of their after-tax income, on a percentage basis, on necessities. In addition to a drag on businesses that produce consumer discretionary goods, a potential social crisis is building. The middle class, while also spending more on necessities, have been reducing their spending on non-essentials.
In a nutshell, we see the dilemma facing our economy and our society in the months and years ahead. Consumer spending has generated 70% of U.S. GDP for as long as anyone can remember. But if the current patterns continue, it now looks like the "shop 'till you drop" consumer culture is taking its last breath. What will take the place of consumer spending to spark economic growth in the future? Worse, what if the cost of necessities continues to rise, unemployment remains stuck at or close to where it is currently, and growing numbers of poorer Americans find it harder and harder to feed themselves?
We continue to search for some signs of sustainable trends that might provide any solutions - so far without any luck.
Making the point in dramatic fashion, the October 6th Wall Street Journal published an article with this headline:
"Middle Class Slams Brakes on Spending"
For an economy dependent on consumer spending, this can't be good. These are the steepest declines in 25 years - since these statistics began being recorded in 1984. And the article notes that this decline in spending comes even as household after-tax income remains "relatively stable." What's going on?
Before we focus on the middle class, let's recognize the dilemma faced by the poorest Americans. Their after-tax income has, in fact, declined by 5.5% to around $9,956. So why the rise in spending? It seems that necessities like food, rent and utilities have gone up. Increased funding for food stamps may help here, but the numbers tell us that the poor are facing a tough road ahead - especially if food price increases escalate as some are predicting.
Combine this with recent increases in "households with very low food security" and we may soon face a dramatically growing social crisis. USDA statistics show these "households with very low food security" increasing from 3.5% to 4.1% of total households for the years 2003-2007 (the latest statistics available). The definition of "very low food security" is households "in which food intake of one or more household members was reduced and normal eating patterns disrupted due to inadequate resources for food." Since the financial crisis and recent recession began in 2007, it's reasonable to suspect the numbers have deteriorated since then.
As for the middle class, their situation is less dire. It's not that middle class families don't feel the pinch of rising food prices. They do, but they simply have (by definition) more discretionary spending - more money to spend on items besides food and other necessities. So they conceivably aren't facing hunger as may be the case for increasing numbers of poor.
Still, the news isn't good for the economy as a whole. Logically, if total spending by the middle class goes down, and the percent of spending on necessities (food, rent, utilities - and let's not forget health care) goes up (it's up for everyone, not just the poor), what's left for everything else? Add in high unemployment, and the beginnings of a general trend toward saving rather than spending, and it's hard to see how and when economic activity will pick up anytime soon.
So the poor are pressed to spend more of their after-tax income, on a percentage basis, on necessities. In addition to a drag on businesses that produce consumer discretionary goods, a potential social crisis is building. The middle class, while also spending more on necessities, have been reducing their spending on non-essentials.
In a nutshell, we see the dilemma facing our economy and our society in the months and years ahead. Consumer spending has generated 70% of U.S. GDP for as long as anyone can remember. But if the current patterns continue, it now looks like the "shop 'till you drop" consumer culture is taking its last breath. What will take the place of consumer spending to spark economic growth in the future? Worse, what if the cost of necessities continues to rise, unemployment remains stuck at or close to where it is currently, and growing numbers of poorer Americans find it harder and harder to feed themselves?
We continue to search for some signs of sustainable trends that might provide any solutions - so far without any luck.
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