Is the Middle Class Really Vanishing?
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I'm no populist. But I can spot trends, and it isn't too difficult to see that there is something interesting happening in retail. There is a clear pattern in which retailers "in the middle" like JCPenney and Sears (NASDAQ: SHLD) are suffering a bit of an identity crisis. Those companies on the extremes of the retail spectrum are the ones currently experiencing the most success. A recent article here on the Motley Fool discussed this very trend and pointed out that, "things have taken an odd turn recently. It looks like both luxury goods and discounters are now a great place to invest."
So why is this happening? In the current climate of the success of the "haves" like Nordstrom (NYSE: JWN) and Lululemon (NASDAQ: LULU) and "have nots" like Wal-Mart and Dollar Tree (NASDAQ: DLTR), it is easy to point to the struggling "middle class" companies as yet another example of the incredible shrinking middle class. The statistics are tossed around all the time (courtesy of the New York Times):
-The share of after-tax household income for the top 1 percent of the population more than doubled, climbing to 17 percent in 2007 from nearly 8 percent in 1979.
-The most affluent fifth of the population received 53 percent of after-tax household income in 2007, up from 43 percent in 1979. In other words, the after-tax income of the most affluent fifth exceeded the income of the other four-fifths of the population.
-People in the lowest fifth of the population received about 5 percent of after-tax household income in 2007, down from 7 percent in 1979.
These all make good headlines, and excellent campaign platforms, but what do they really imply? That rich people have more money than poor people. That's about it. Is the wealth gap growing? yes, but not really at an alarming rate. Is the middle class shrinking? No. Not by much. The core truth, and final statistic discussed in the aforementioned list is:
-People in the middle three-fifths of the population saw their share of after-tax income decline by 2 to 3 percentage points from 1979 to 2007.
In other words, the middle class has been pretty much stable for the past 30 years. A decline of 2-3% is pretty negligible, especially over such a long period of time. Additionally, the statistics so often bandied about do not include government transfer payments as income. A March Washington Post Op/Ed piece states, "when [Economist Richard Burkhauser] calculates the impact of government transfers, the value of health insurance not paid for by households and the decline in household size, the bottom 20 percent had about 25 percent more income in 2007 than 1979. Even the bottom is moving up." Although it is true that the top is moving up far faster than the bottom, that doesn't necessarily mean the top steals from everyone else. It's tough to realize this fact when the rich are just so damn rich, but really, if we didn't have such a fetishistic fascination with the "good life" through media don't you think our middle class lives would feel a whole lot better? Not to mention the politicization of this whole thing… but that's a whole different story.
What's the point? The disappearance of the middle class is overblown. So it's a mistake to weed out "middle-class companies" as possible investments based on this alone. The better strategy in this market is to understand that consumers, instead of buying for their class, are simply becoming more savvy. It is easy to know the value proposition offered by the extreme ends of the retail spectrum: Nordstom offers quality, Dollar Tree offers price. What does Sears offer? As so intelligently described by the Motley Fool's Andrew Marder, Sears is a classic "sofa-bed" company. They're a bad sofa and a bad bed, and they need to choose where they want to specialize. The company whose brand can be boiled down into one word are the ones to be watching: Dollar Tree = Practical. Nordstrom = Elegant. Lululemon = Healthy. Whole Foods = Natural. JCPenney = Uhhh? You get the idea.
TheLaowai has no positions in the stocks mentioned above. The Motley Fool owns shares of Lululemon Athletica. Motley Fool newsletter services recommend Lululemon Athletica. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
