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Judy Loy: Where is the Middle Class?

by on July 01, 2012 7:52 AM

In Centre County, we tend to weather economic challenges with less pain than other areas of the country.

We didn’t get the nickname Happy Valley for nothing.

An American Community Survey from 2006 showed that Centre County Residents enjoy a higher standard of living than other areas of Pennsylvania or the nation. The median income is six percent higher than the rest of Pennsylvania and five percent higher than the nation.

This may come from the fact that due to the university, our residents are almost twice as likely to have a college or post-graduate degree as elsewhere in the country. Given this statistic, what is happening in the U.S. that we are shielded from, should we be worried and how might it affect our portfolios?

The wealth gap that is being studied and campaigned on in the United States is about more than just the rich getting richer. It is about the disappearance of the core of American strength: the middle class.

The wealth in the United States is being concentrated in the top one percent, with that demographic holding 40 percent of America’s wealth and taking home 24 percent of our national income (Zaid Jilani’s Research for ThinkProgress in October 2011).

The wealth gap is about the collapse of class mobility in the United States. The problem may become worse. As the cost of higher education gets out of reach for a typical family without large student loans, the middle class may be priced out of the historical stepping stone to greater wealth and better careers.

To start, let’s look at what defines the middle class in America. The middle class in the U.S. has been hurting with the great recession and over the last 10 years with income falling seven percent for the 10-year period ending in 2010. Their net worth was also hit because a larger part of their wealth is typically in their homes.

Middle class households for 2010 were defined as those families in the middle three-fifths making between $20,700 to $99,900. The real median income (half make more, half make less) for a family of four in the U.S. is $49,445. What does this mean for America and what does it mean for investors?

In short, America needs to find a way to regain its middle class. Social mobility and the American Dream are by far one of the main reasons that our economy and country have been so strong. Finding a way to regain the balance is vital to the country’s health.

The markets are following the lead of the country and companies that cater to the very rich or the poverty-stricken are trending favorably. Take Dollar Tree (DLTR), which has all its merchandise priced at $1. Its stock increased by almost 56 percent in the past year as of Friday.

Wal-Mart (WMT) is up 30 percent in the same period. People are watching their wallets and shopping at lower-end retailers trying to get better deals. (Just a reminder, these thoughts are merely a note on historical performance and past performance does not guarantee future results. Always take into account your risk tolerance and time frame when making investment choices.)

The upside is that a middle class, previously non-existent in emerging countries, is growing and can mean major shifts for investing and the global economy.

A perfect example is China. While we have seen declining earnings in the US, China’s income levels have quadrupled from 2000 to 2010. The average annual income went from $760/person to $3,000/person during that 10-year period.

In addition, Chinese reported income is probably lower than actual income because many citizens underreport income from their government and a lot of under the table payments are not reported. Most Chinese citizens do not consider themselves middle class and the definition is murky in China.

However, it is undeniable that Chinese workers are creating a higher standard of living for themselves and are able to spend more on discretionary items. In fact, China is second only to the United States as a consumer of luxury brands. Apple’s (AAPL) sales quadrupled in China in 2011 alone and Merck is expecting sales to surge 30 percent in China. This comes as their growing middle class can afford better healthcare and medicines.

The changing global demographic landscape can have major ramifications for our country’s economy and our corporations’ sales. It is something to keep in mind when it comes to politics, our future and our personal investments.

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Judy Loy, ChFCâ, is a Registered Investment Advisor and CEO at Nestlerode & Loy Investment Advisors, State College, Pa. A graduate of Penn State University, Loy has been with the firm since 1992, assisting clients with retirement planning, brokerage services and investment advice. She can be reached at jloy@nestlerode.com.
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