The Breakdown | Explaining Southern California's economy

A brave new world for getting and spending

Declining incomes plus frugal shoppers equals a whole new ball game for retailers.
Declining incomes plus frugal shoppers equals a whole new ball game for retailers.
Mario Tama/Getty Images

Are we starting to see some kind of paradigm shift in the way people earn and spend? I'm far from sure, but in the last week and a half, I've seen a few signs that's something's afoot. Median household income has evidently declined since the end of the recession, while consumers have reduced their spending — and may not increase it any time soon.

Reuters Felix Salmon offers a quick summary of a some U.S. labor data data now being processed by Sentier Research. You can easily see what the really troubling thing is: "In dollar terms, median household income is now $49,909, down $3,609 — or 6.7% — in the two years since the recession ended. It was as high as $55,309 in December 2007, when the recession began."

This is why the "recovery" feels like anything but. Meanwhile, the Wall Street Journal took a look at the new frontier of frugality:

Retailers are coming to terms with a new reality: the consumer who traded down during the recession and never came back.

Buffeted by high unemployment, heavy debt loads, falling home values and high food and gas prices, these shoppers have been whipped into a permanent state of consumer caution. They buy only what they need, avoid premium labels, clip coupons and scour sales.

I've written about this before, but in terms of what it means to be "middle class" being redefined:

[I]t isn't that the middle class is vanishing so much as being downshifted. Somebody who could formerly have been making $30 an hour is now making $15. This has many implications, but I like to look at it not in terms of the usual middle-class markers of income or access to "lifestyle" milestones — such as a car, two cars, a house — but access to finance. 

Simply put, if you're in the middle class, you have access to the kind of finance that the wealthy have, although your access isn't nearly as extensive (you don't have deep capital reserves or abundant multi-generational assets if you're middle class because your status is largely derived from earnings). This is why things look so bad for the middle class right now in the U.S.: the financial crisis has been just that — a disaster for everyday access to abundant, low-cost borrowing. There are extremely complex reasons why this happened, but the bottom line is inevitable: the American middle class isn't going away, but it has lost its power. And it's going to be hard to get it back.

If I'm right, then we need to get used to two things: first, a limited ability to cover the income gap that Felix talks about above, with the borrowing that we got used to in the past; and second, a remaking of demand. If consumers truly are recognizing that they can't exercise demand at previous levels, then the way companies sell stuff will have to change.

This will be an opportunity, for somebody. But selling to the old idea of the U.S. middle class may not be as successful as it has always been.

Follow Matthew DeBord and the DeBord Report on Twitter.