The Struggles of the Middle Class

The Bureau of Labor Statistics also reported that "In August, the number of persons employed part time for economic reasons ... increased by 331,000 over the month to 8.9 million." Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule. These workers are included in the alternate measure of labor underutilization (U-6) that increased to 16.7% in August from 16.5% in July. The U-6 number reflects the total unemployed people, plus all persons marginally attached to the labor force, plus the total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force. Persons marginally attached to the labor force are those who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the past 12 months. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not currently looking for work. Whew!

I find the U-6 number to be very discouraging. It means that one in six Americans are either unemployed or working less than they would like. Needless to say, the unemployment problem has had a profound negative impact on consumer spending and I thought you would be interested in seeing how this has manifested itself in e-commerce.

First, let’s look at e-commerce spending trends within income segments:

The middle income segment ($50K-$100K) is the largest segment and accounts for 41% of all online sales, but it’s clear that the spending power of middle-income consumers has weakened considerably. In Q2 2010, they spent 2% less money online than they did the year before and a whopping 9% less than two years ago before the recession really hit home. In contrast, the highest income sector (more than $100K per year) appears to be in good shape, accounting for 37% of sales and growing at a rapid clip (+17%). People in the lowest income sector only account for 22% of e-commerce sales but are also showing strong growth, driven (as we shall see) by financially secure and Internet-literate consumers in smaller households.

The negative impact of household size on spending power is clearly revealed if we look at spending trends according to presence of children within the household.

We can see that very strong growth occurred within households without children (+27%) but for those households with children, spending is under severe pressure and has declined by 9% versus year ago. The BLS reported that in August the unemployment rate for workers 16 to 24 years of age was a staggering 18.1%, causing many to move back to live with their parents. This simply compounds the already existing financial pressure on the middle class.

It’s also informative to examine spending trends by age of household head:

Here we see that it is the older households (with a head age 45 and older) that are generating online spending growth (+22%). In contrast, households with a younger heads spent marginally less in Q2 2010 than they did the previous year.

So, in summary, we can see the negative impact that the unemployment situation is having on the middle class. The middle class – defined as households in the middle income sector with children and younger heads -- are apparently not in an economic position to be able to increase their e-commerce spending, leaving it to the higher income, smaller and older households to generate growth. This was also well documented in a recent LA Times article.

Looking to the future, the middle class faces a period of great uncertainty. As reported by AP business writers:

Even when the job market picks up, many people will be left behind. The threat stems, in part, from the economy's continuing shift from one driven by manufacturing to one fueled by service industries.

Pay for future service-sector jobs will tend to vary from very high to very low. At the same time, the number of middle-income service-sector jobs will shrink, according to government projections. Any job that can be automated or outsourced overseas is likely to continue to decline.

The service sector's growth could also magnify the nation's income inequality, with more people either affluent or financially squeezed. The nation isn't educating enough people for the higher-skilled service-sector jobs of the future, economists warn.

"There will be jobs," says Lawrence Katz, a Harvard economist. "The big question is what they are going to pay, and what kind of lives they will allow people to lead? This will be a big issue for how broad a middle class we are going to have."