Where will U.S. retailers find middle class growth?
"The American Middle Class is No Longer the World’s Richest." This recent New York Times front-page headline played to both sides of the political spectrum as each blames the policy of the other for our nation’s economic ills. Unfortunately, the issue is even more significant than the politicos and pundits would have us believe.
A straight-line projection of the growth in income of the middle class around the world would suggest that the United States will soon be in fourth or fifth place, rather than first. By the way, we are not talking about developing countries. We are talking about being overtaken by advanced countries, such as Canada, Sweden, Norway, Finland, the Netherlands and Britain.
Politics aside, why is this important? "Middle class" often has a nebulous definition but is generally defined as the second, third and fourth quintiles in income or wealth. It is this group that buys housing, furniture, cars, computers, mobile phones, clothing, and more, driving the economy forward. The spending of the bottom quintile is limited by access to income. The spending of the top quintile is incomplete in that this population tends to save and invest a higher portion of its income rather than put money back into the economy.
It is not just a vast majority of economists that testify to the value of the middle class, history shows us the way. The greatest economic boom in the history of world was experienced by the U.S. from 1950 to 1970. During that time, the share of total income of the top docile of the population dropped from 45 percent to about 33 percent. That provided a huge gain for those in the middle and the impetus for staggering growth. (U.S. tax rates during this period, by the way, were the highest in the history of the country. The top marginal tax rate was 90 percent.)
Today, the top docile represents close to 50 percent share of total income, the highest level since at least 1900. The result, especially in the last 10 years, has been a lack of growth in real income for those who drive the economy.
The statistics are shocking. While the per capita median income in the U.S. has not changed since 2000, the advanced countries mentioned above grew 14 percent to 20 percent. Even in France, the bottom 99 percent are doing better than in the U.S.
And we haven’t even addressed the rest of the world. The top one percent in the U.S. is still the richest and will continue to be for a long period of time. And the "poor" in the U.S. are no longer the richest "poor" in the world. McKinsey forecasts that the middle class world-wide will grow by one billion people by 2020. That’s three times the population of the U.S. They follow with a forecast of two billion by 2030.
While this news isn’t a sea change in trend, it is a sea change in mindset. Some huge multi-nationals aside, American companies have largely failed to recognize this and adjust appropriately. They are now faced with a new reality — a waning U.S. middle class with no sign of a turn-around coupled with unprecedented opportunities overseas as middle class populations blossom.
- The American Middle Class Is No Longer the World’s Richest – The New York Times (tiered sub.)
- Back Story: How We Found the Income Data – The New York Times (tiered sub.)
- This simple table summarizes our story on American living standards. – The New York Times (tiered sub.)
- Hitting the sweet spot The growth of the middle class in Emerging Markets – Ernst & Young
- The U.S. Middle Class Cedes Gold to Canada – Bloomberg Businessweek
- Capturing the world’s emerging middle class – McKinsey
- Capital in the 21st century – Thomas Piketty
How should retailers and marketers adjust to the waning middle class in the U.S.? What opportunities exist for American companies to take advantage of the booming middle class outside the U.S. borders and what changes must they make to participate in this opportunity?