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They Gain More, Spend More; With Job Market Rising,
By JON E. HILSENRATH and SHOLNN FREEMAN
Staff Reporters of THE WALL STREET JOURNAL
July 20, 2004; Page A1
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With the U.S. economy expanding and the labor market improving, it isn't clear how well the Democrats' message of a divided America will resonate with voters this fall. But many economists believe the economic recovery has indeed taken two tracks, exemplified by the experiences of these two Texas residents. Upper-income families, who pay the most in taxes and reaped the largest gains from the tax cuts President Bush championed, drove a surge of consumer spending a year ago that helped to rev up the recovery. Wealthier households also have been big beneficiaries of the stronger stock market, higher corporate profits, bigger dividend payments and the boom in housing. Lower- and middle-income households have benefited from some of these trends, but not nearly as much. For them, paychecks and day-to-day living expenses have a much bigger effect. Many have been squeezed, with wages under pressure and with gasoline and food prices higher. The resulting two-tier recovery is showing up in vivid detail in the way Americans are spending money.
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The perception of a fast-lane/slow-lane recovery has become a central political issue. This year's stronger job market has led Democrats to shift their emphasis: away from the argument that Bush policies have failed to produce jobs and toward the idea that the expansion's fruits haven't been widely shared. "They're telling people this is the best economy we've had," Sen. John Kerry mockingly told a riverbank crowd last Thursday evening in Charleston, W.Va., drawing jeers. "What does it mean when you don't have any health care at all?" Hands started popping up throughout the audience, as Mr. Kerry paused to point to each one. "Too many people in Washington have no sense at all about what's happening," he said. His running mate, Sen. John Edwards, speaks of "Two Americas," one "that does the work, another America that reaps the rewards."
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Mr. Maki of J.P. Morgan Chase estimates that in terms of dollars saved, the top 20% of households by income got 77% of the benefit of the 2003 tax cuts, and roughly 50% of the 2001 tax cuts. And of stocks held by households, roughly 75% are owned by the top 20% of those households. That made them prime beneficiaries of last year's stock-market rally, although also big sufferers from the stock carnage from 2000 to 2002. The affluent also benefit more from stock dividends, on which the federal income-tax rate was cut last year retroactive to the start of 2003... Meanwhile, housing values have appreciated fastest in the most affluent regions during the past three years, according to research by Fiserv CSW Inc., which tracks home prices. Many economists say the lopsided recovery is now at a critical juncture. The impetus from new tax cuts has largely passed, and the stock market has lost momentum, two factors that could slow the pace of higher-income people's spending in the months ahead. As a result, the time has come for the recovery either to broaden out to more-modest income groups -- or possibly lose momentum.
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But some economists worry that the early stage of the recovery for low- to middle-income families is being squeezed by continuing pressure on wages and purchasing power. Average hourly earnings have risen at just a 1.9% annual rate since the job market started improving notably last August. Meanwhile, the consumer-price index -- driven by higher food and gasoline prices -- has risen at a 3.3% annual pace. The average worker's purchasing power, in other words, has declined even as more people have been finding jobs since August. Weekly earnings for production workers and nonsupervisors at service companies, adjusted for inflation, were down 2.6% in June from a year earlier. This slip might be transitory, and it wasn't anywhere near the drops of 5% to 7.5% registered in the late 1970s and early 1980s. Still, it was the largest decline since 1991, and it is a shift from the late 1990s and even the 2001 recession, when real wages were increasing. As a result, after rising last year, the University of Michigan's consumer confidence index for lower-income households is off 12% so far this year. Confidence among the affluent is lower as well, but by a smaller 6.7%... Many in this group are also getting squeezed as health-care costs rise and companies seek to shift the burden to workers. From 2000 to 2003, employees' average annual out-of-pocket expenses for family medical premiums rose 49% to $2,412, according to an employer survey by Kaiser Family Foundation, a nonprofit research group in Menlo Park, Calif.
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Write to Jon E. Hilsenrath at jon.hilsenrath@wsj.com and Sholnn Freeman at sholnn.freeman@wsj.com
URL for this article:
http://online.wsj.com/article/0,,SB109027263697767730,00.html(paid subscribers only)
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