I wanted to share with you in this article of why the American middle class is disappearing. We know in this day and age life in America is different from back in the 1900’s. Back then the American Dream was a big deal. It was a reality for many to be happily married with beautiful children, and a nice house behind a white picket fence.
However, in this modern age, the cost of living is higher. But there are more ways to make money than before. Technology is more advanced. We have access to the Internet, powerful computers and touch screen devices. This advanced technology gives us access to TV shows, games, and social media.
With more ways to access entertainment comes more distractions. However, this article isn’t focused on the use of technology or consumption of entertainment. What I’m sharing is how the cost of living and the earning potential of Americans have changed.
This change has caused a steady decrease in the American middle class. The American Dream is more of a dream than ever for many Americans. More people are renting apartments than owning houses. Homelessness is out of control in states like California and New York. And the country is in more debt than we could ever imagine.
Here are some of the reasons why we’re seeing a decrease in the middle class bracket:
The Shrinking Middle Class
The gap between the lower income and the upper income classes are becoming smaller. We were warned about the gap between them getting tighter before the 2008 recession hit. Back in 2006, for instance, there were two men with one message. Former President Donald Trump and author Robert Kiyosaki released their collaborative book “Why We Want You to Be Rich.” Released in 2006, they emphasized that the rich are getting rich, and the poor are getting poorer.
If statistics are of any indication of this trend taking place, then we should be preparing ourselves to fall within the upper income category.
A resource covering such statistics was recently provided by Pew Research. In this article, back in 1971, 25% of Americans were in the lower income class. 61% were in the middle class income bracket, while 14% were upper income.
Fast forward to the year 2021. The lower income rose to 29%, a 4% increase over 50 years, the middle class shrunk to 50%, and the upper income rose to 21% within that same time period. What also changed over the 50 year period was the aggregate U.S. household income.
In Pew Research’s same studies, they discovered that the share of aggregate U.S. household income held by the middle class fell steadily, from 62% back in 1970 down to 42% in 2021. That same time period, the share of aggregate income accounted for by upper income households rose from 29% to 50%. Lower income only saw a small decrease (from 10% to 8%) in that time frame.
It’s safe to say that, based off this research, the upper income class is slowly making a bigger presence.
Living Paycheck to Paycheck
It is no lie when anyone in America says that they are just scrapping to get by. Millions of Americans can also relate. According to a news article by CNBC, about 58% of Americans are living paycheck to paycheck. In the Census data as of 2020, there are a little over 331,000,000 U.S. citizens. That means that almost 192,000,000 people could possibly be making ends meet.
A large reason of that could be that a lot of Americans are relying on one source of income, which could be their 9 to 5. They go to work to clock in, put in their 8 to 10+ hours, then clock out, only to do it all over again the next day. This is considered earned income. For most Americans, they are trading their time for money.
However, millions of Americans have realized that one job won’t cut it. This is why they’re either working 2-3 jobs, or doing side hustles to get by. According to CNBC, 44% of Americans do side gigs just to make ends meet. These side gigs could include ride sharing, food courier services, freelancing on Fiverr, etc.
Rising Fuel Prices & Goods
Millions of Americans are feeling the financial pressure from one of (if not the) highest spike in gas prices ever. According to Bank Rate, the average gas prices were at $4.24 a gallon in the U.S. during Spring time in 2022. But if you live in California like me, your bank account likely took a bigger dive when filling up. In the same time period in California, gas prices rose to over $6.00 a gallon.
However, these were the fuel prices for consumer, where diesel fuel prices were either similar or slightly higher. The logistics industry took a hit with rising fuel prices, which created a domino effect.
Rising fuel costs to haul goods means trucking companies had to charge B2B customers more to deliver those goods. That means us the consumer have to eat those costs. This is why prices for groceries, hygiene products, personal care products, and other goods have increased to new heights.
American Spending Habits
We know one factor of how the middle class maybe shrinking is many having one income source to rely on for their livelihood. Another factor could be how Americans handle their money when they get more of it.
Understandably, Americans during the early stages of the COVID-19 pandemic weren’t able to spend as much since they were in their homes. However, that didn’t stop them from making purchases over the Internet. Amazon especially thrived, with a bump in online purchasing activity. But Walmart, Target, Wayfair, and Home Depot faired pretty well also.
Also during 2020, people were at home streaming on Netflix and Hulu. This meant subscriptions on streaming services increased. More people, aside from streaming, also turned to gaming to pass the time. Mobile games, according to Sensor Tower, saw a healthy increase on in-app purchases.
Even though the pandemic made people adjust their spending habits, that would all change in time. According to some research from McKinsey, spending was on the low side in 2020 due to the pandemic. As we know clothing apparel, travel, hospitality, and out of home entertainment like movie theaters all suffered.
By the third stimulus check everyone received, spending went through the roof, then dropped a bit and kept a steady pace throughout 2021. But according to that same study, despite inflation, consumer spending has still been in the up and up. Credit card use increased as Americans purchased more goods than services or experiences.
Understandably, many Americans were also receiving the limited-time pandemic unemployment benefits. This increased the weekly benefit amount the unemployed received at about $300 extra. That couple with the stimulus checks meant Americans had more money to spend, thus the increase in impulse spending.
There was a study published on PR Newswire that mentioned the impulse spending amount increasing by 2022. That study was implemented by SlickDeals. In that study, 2,000 people were surveyed and 64% reported an increase in impulse spending in 2022.
SlickDeals disclosed the average impulse spending amount between 2020-2022. The average person spends $314 per month on impulse purchases in 2022, up from $277 in 2021, and $183 in 2020. Whether that number increases or not in the coming months remains to be seen.
Drowning in Debt
This should be the biggest indication of why the American middle class is disappearing. It is hard to stomach the vast amount of debt America as a whole has. CNBC published a video on YouTube called why “Americans Are Drowning in Debt.” In that video, they reported that the total debt balance of the U.S. households is at a staggering $16.15 trillion, up from $11.39 trillion about ten years ago.
You maybe wondering “What is the reason for this amount of debt?” There are four reasons, which include:
- Mortgages
- Student loans
- Car notes
- Credit cards
People have racked up a lot of debt, and are struggling to keep up with their mortgage payments, car notes, and student loans. It doesn’t help that during 2021 we were in a seller’s market. Prices for houses went up at an all time high, especially in California and New York. In fact, back in October of 2021, Fox Business published an article mentioning Sacramento, CA (where I live) being one of the most unaffordable housing markets in America.
In their article they mentioned the average price for a newly constructed home in Sacramento was $650,000. This means residents would need an income of at least $128,000 to afford a home. However, in 2021 the median household income in the capital city was $76,706.
In 2021 there were massive bidding wars on properties. Buyers would pay well over asking price, driving up values of properties everywhere in the neighborhoods. This allowed a lot of sellers to cash out and move out of state. This in turn caused values of properties in other states to increase wherever they moved to. New homeowners are left with large mortgages to pay off.
But you know what they say. What goes up, must come down!!
The real estate market in particular is slowly shifting to eventually become a buyer’s market. The market will correct itself overtime. Some analysts are even saying the housing market could end up worse than the 2008 recession.
If or when the time comes for real estate market correction may spell tough news for property owners. A lot of homeowners may end up with limited to no equity, and potentially upside-down mortgages. Several owners may also end up with higher mortgage payments than before.
In fact, CBS News published an article on what the Federal Reserve interest rates hikes means for your money. News outlets everywhere gave insight on the Federal Reserve implementing four interest rate hikes in one year. Two of those hikes were 0.75 points each.
The interest hike increase reached 2.25%. That means for every $10,000 borrowed, a 0.25% interest hike equals $25 in yearly interest costs. For every $10,000 borrowed, an extra 2.25% in interest means $225 in added interest costs annually.
So Americans everywhere have their one source of income (2+ if they’re doing side jobs, are married or are domestic partners). Nonetheless, U.S. citizens have to keep up with the added costs to purchase their necessities. That while they must also pay their mortgage, car note, student loans, and credit cards.
And for anyone who purchased a car within the last year, we know being that car values went up due to short supply. That only means higher car notes and interest costs on that front as well.
It’s long been past that point where it’s common for people to actually work side gigs or second jobs just to keep up. It’s why the middle class is slowly phasing away. In another 50 years there’s no telling how much higher the percentage of the lower and upper income classes will be.