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Erosion of middle class buying power hits familiar brands

February 9, 2014 at 7:03 PM EDT
Businesses across the country are dealing with a serious post-recession reality: a shrinking middle class consumer base. How are shifting spending patterns playing out for businesses on high, low and middle tiers? Times reporter Nelson Schwartz joins Hari Sreenivasan for more.
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HARI SREENIVASAN: While the conversation about income inequality in Washington takes on a political dimension, to businesses, it’s all about numbers. How much consumers do or don’t spend.

The latest information suggests that the middle class just isn’t spending as much as it used to — and certainly not nearly as much as the rich do.

Here to explain what the income divide means for businesses, we are joined by New York Times reporter Nelson Schwartz.

So in your story you looked at everything from refrigerators to hotel rooms — what are the businesses telling you?

NELSON SCHWARTZ: Basically that things are pretty stagnant in the middle of the economic sphere.  Basically at the upper end – upper-end restaurants doing well. In the middle tier it’s a very different story.  I looked, in the restaurant space, at Olive Garden and Red Lobster are having a hard whereas Capitol Grill is doing very well. They are all owned by the same company, Darden. It’s just very, very different trends. It’s not as if people don’t like the food at Olive Garden or Red Lobster because we’re seeing the same thing going on in hotels, casinos and stores. Like Loehmann’s is going out of business; Sears and JC Penny having a hard time but the dollar stores doing well. You’re really seeing it in sector after sector.

HARI SREENIVASAN: So what’s contributing to these divergent trends? Why are perhaps the rich spending more or the middle class spending less?

NELSON SCHWARTZ: I think it’s a couple of things. Primarily it’s that people who own assets like real estate, like stocks are doing very well. The stock market is up – the housing market — big rebounds since 2008. If you’re just depending on salaries though there is no growth in income. I think that’s a big factor.  Even as costs of things like healthcare and education are going up so what are middle class people going to cut back on? They’re going to cut back on going to restaurants. They’re going to cut back on shopping for clothes and that kind of thing. I think that’s really driving it.

HARI SREENIVASAN: So what are the longer-term consequences if there’s a middle class that’s eroding its purchasing power?

NELSON SCHWARTZ: The problem is that the economy can grow just based on consumption growth at the very, very top end. Just putting aside questions of fairness or social mobility – the economy can grow, but it can’t grow that fast. So let’s say right now the economy is growing at two percent which isn’t enough to bring down unemployment very substantially. It can grow at that pace but we’d like to see growth at say three, three and a half percent like we saw in the 90s and that’s not going to happen if the bottom 80 percent of the population is left behind in terms of benefitting from growth.

HARI SREENIVASAN: So when you look at those numbers the bottom 80 percent is spending about as much as the top five percent are.

NELSON SCHWARTZ: The growth, basically we found working with economists at the Washington University of St. Louis and the Federal Reserve of St. Louis, we found that basically if you looked at how much of the consumption growth came from the different categories. Basically, the top 20 percent consumption increased about 17 percent; whereas consumption has only grown about one percent from the bottom 80. So that increase is really driven by wealthier households.

HARI SREENIVASAN: All right, Nelson Schwarz from the New York Times thanks so much.

NELSON SCHWARTZ: Great to be here.