The actions of the middle class can define an economy because of the way in which they tend to both create and spend a great deal of value within a given consumer market. That being said, keeping track of their habits can be a somewhat frustrating task. Between the eclectic nature of their spending habits, and the breadth of the middle-class income bracket, it can be difficult to determine exactly what kind of spending is middle-class, and what is simply just consumer spending. By taking a moment to define the spending habits of the middle class, we can then better understand how it is that their actions impact the overall economy, or indicate upcoming trends.
The middle class is broadly defined as being a societal grouping that has access to education, and will generally hold some kind of professional qualification. From there, this grouping can be tiered out into ‘upper’ and ‘lower’ middle classes between the nature of these qualifications (ie. lower middle class will usually be composed of tradesmen, while the upper will be made up of professional managers or scientific professionals. The main distinction then from here is that these individuals will earn an income of anywhere between $40,000-$1,000,000/year (average is usually around $60-80k), and exist to be between 32-46% of the US population, making them a massive spending force.
The interesting point about this class to then keep in mind is that, despite their larger incomes, they still use debt financing to make their major purchases (ie. mortgage financing for homes at larger prices), credit cards to manage their regular spending, and they tend to place value on owning their assets. From there, they place value on purchasing small luxuries, and see benefit from services offered that will save them time. Looking at this broad picture of our audience, we can then start to look at a basket of information that provide us with some insights into how it is that this class grouping spends in our economy, and its impacts.
One of the best ways to keep track of middle class spending is to look at the change in sales growth for a basket of companies that represent specific aspects of their purchasing budgets. For example, we can start by looking at how it is that mid-level brand names and distributors like JC Penny, Best Buy, Sears, Barnes & Noble, and Gamestop have shown an increasing trend towards reduced sales. These companies are actually taking steps towards closing down hundreds of locations because of the way in which their sales levels cannot support their continued operations. From there, looking at how it is that the average consumer (overall) is showing traits of having more credit card debt than they have funds in their bank accounts, we can start to see a situation developing where perhaps our middle class grouping is starting to run out of access to funds.
From there, we can see how it is that student loan delinquency rates in the USA are starting to hit all-time highs, meaning that our grouping of people that have paid for post-secondary education are not able to afford their education in retrospect, despite the extremely generous terms of these programs. Again, this is indicative of a reduced liquidity presence in a very specific consumer group. Lastly, we can see how it is that chain-restaurants such as Subway, the Olive Garden, Red Lobster, and LongHorn Steakhouse are all showing lower earnings for the few periods, mainly attributed to the reduced purchasing power of patrons.
Looking at this information, we can walk away with the key insight that the middle class is losing its purchasing power in the USA, mainly because of the way in which it has become particularly leveraged against previous purchases. This suggests that future consumer spending will be reduced, because the consumer no longer has access to money as it used to. What does this mean for us as investors? It means that consumer discretionary products are not likely to surge anytime soon without a major growth driver (especially if interest rates go up at all), and we need to be taking a step back to look for safe investments into the near-mid future.