The squeeze on middle America will be long lasting.
There's little doubt that the American middle class—the 40% of households with annual incomes between $50,000 and $140,000 a year—is in distress. Even before the recession, incomes of American middle-class families weren't keeping up with inflation, especially with the rising costs of what are considered the essential ingredients of middle-class life—college education, health care and housing. In 2009, the income of the median family, the one smack in the middle of the middle, was lower, adjusted for inflation, than in 1998, the Census Bureau says.
Economist Edward Wolff of New York University estimates that the net worth—household assets minus debts—of the middle fifth of American households grew by 2.4% a year between 2001 and 2007 and plunged by 26.2% in the following two years.
A researcher for Procter & Gamble Co. (P&G), recently asked a 40-year-old single mother to describe her family, her favorite pastimes and how she feels about money. This low-income consumer is part of a long-term P&G study tracking several consumers over time to gauge how sentiment is evolving as the economic slowdown wears on.
Despite waitressing to supplement her 20-year career as a support specialist at a cable company, the woman said that her finances are strained as utility bills, gas prices and the expenses of her two daughters keep growing. Her scrupulous budgeting of household expenses hasn't alleviated the pinch. "Instead of getting in a better situation, I feel like I'm getting in a worse situation," she said
To monitor the evolving American consumer market, P&G executives study the Gini index, a widely accepted measure of income inequality that ranges from zero, when everyone earns the same amount, to one, when all income goes to only one person. In 2009, the most recent calculation available, the Gini coefficient totaled 0.468, a 20% rise in income disparity over the past 40 years, according to the U.S. Census Bureau.
"We now have a Gini index similar to the Philippines and Mexico—you'd never have imagined that," says Phyllis Jackson, P&G's vice president of consumer market knowledge for North America. "I don't think we've typically thought about America as a country with big income gaps to this extent."
"This has been the most humbling aspect of our jobs," says Ms. Jackson. "The numbers of Middle America have been shrinking because people have been getting hurt so badly economically that they've been falling into lower income."
Source: The Wall Street Journal, September 12, 2011