Interesting data point. Perhaps a bit more evidence of the real wealth flowing from low to high income Americans:
The proof is emerging in dealer showrooms, where customers are buying more of Detroit’s cars and paying higher prices. In July, G.M., Ford and Chrysler sold their vehicles at an average price of $30,400 — $1,350 more than a year ago and higher than an overall industry gain of $1,100, according to the auto research Web site Edmunds.com.
The upper 5% gets 37% of income, the upper quintile makes 60%, and the bottom 80% only gets 39.5%.
U.S. Economy Is Increasingly Tied to the Rich
Easy to figure where most consumption comes from during a balance sheet recession when the middle class is increasing savings and paying down debt.
To constrict demand in the face of inflation, it’s clear where taxation has to withdraw funds. But to increase lagging demand in recession, tax cuts on the upper echelon look to work. Making them permanent is a bad idea, though.
Tom, if you drew those numbers from the article, they’re supposed to be percentages of consumer outlays (whatever that means), not income.
What was particularly interesting, however, is the article claims that the savings rate of the “wealthy” (I think top 2% by income, but the definition is left unclear) was -7% in 1st Q, 2010. Pretty shocking given the current budget deficits. It is probably the case that the lagged performance of the stock market has a strong effect on the spending habits of this group.
Thanks for the correction for the slip up, ESM. My bad.
The intention was to use the numbers as they are meant in the article to show how consumption is highly skewed toward the top. Of course, this is reflected in income and wealth inequality, too, which has been growing wider.
The idea that the top just saves and does not spend is incorrect. A recovery in consumption will come from spending at the top, and only be reflected toward the bottom later. As you note, the wealthy have lost a great deal, too, and “balance sheet repair” is also needed toward the top. With banks still awash in toxic assets, lending won’t be strong very soon, either.
question is, where is there greatest elasticity of demand?
if discretionary spending sits with top income bracket, then that is where you will get big shift in AD. if discretionary spending sits with lower income bracket, then that is where you will get the shift.
most saving is done by high income and poorer have less ability to save — both by economic neccessity and maybe also becomes of poorer impulse control. that is argument for stimulus going to poor — they are sure to spend it.
but in balance sheet recession, right strategy may be to repair sheet at top, and have them step back up as providers of marginal AD, which is where they operate usually
Tom,
Here
is link to chart of SPDR Consumer Discretionary vs. SPDR Consumer Staples. You can vary the time frame of the chart to the time frame from March 09 (start of stimulus) thru present. The XLY (discretionary) just took off and outperformed XLP (staples) by what is probably an all time record of out-performance (and under Democrat govt as many have noted here in past).
To think the trade was to go long discretionary at that time…you could have made a lot of return over investing in staples.
“To think the trade was to go long discretionary at that time…you could have made a lot of return over investing in staples.”
Matt, I’m old enough to remember March 2009. I was there. I was actively involved in the markets. The fear was palpable. The administration was completely floundering, Geithner was making a fool of himself, and Barney Frank was threatening to change the Chapter 13 bankruptcy laws. In addition, the stimulus package had been passed weeks before, and investors were fretting that it was too small with too much of the spending back-loaded. But at the same time, everybody knew things were overdone. The selling was technically driven panic selling, not based on fundamentals.
The performance of XLY is completely in line with the performance of risk products generally across the globe since March 2009, and most of that performance can be attributed to a rebound from the massive liquidation that took place.
My point is that you shouldn’t read too much into a doubling in price of a risky equity security from the 12-year lows in the stock market. And quite frankly, the stimulus package has been a dud. Some of the Fed’s liquidity programs have helped a lot, as has TARP, but it is the budget deficit brought on my automatic stabilizers kicking in that has done most of the heavy lifting.
So the average guy should “Find out where the money is going and THA-ROW yourself in it’s path”. Whilst promoting MMT, of course.
Warren, do you think the Euro is going towards parity with USD?
possible, but looks to me like the forces are in place for it to go back to 150. see previous posts from several weeks back
What world. It’s crazy. The average car–transportation!–almost the equivalent of an average year’s salary! You used to be able to buy a new car for a couple or three months wages at most.