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Top Income-Earners Drive U.S. Economic Growth

Have you been surprised by the slow but steady growth in the U.S. economy over of the last three years and the accompanying doubling in U.S. stock prices in major indexes of the broad stock market? The explanation for these two very positive economic developments may lie in the distribution of income and spending in America, specifically, in their skew toward wealthier individuals. To be clear, it’s not the top 1% of wealthiest Americans driving the recovery but the top two income quintiles, the middle class — the top 40%. 

The top two income quintiles account for 61% of total spending in the U.S. economy, according to statistics released in September 2012 by the U.S. Bureau of Economic Analysis. The bottom two quintiles account for just 22% of total spending.

The top 40% of income earners in the U.S are in good enough financial condition to spend at a level sufficient to fuel slow growth, and recent economic reports indicate that this is likely to continue. Consider the following:

Auto Sales are recovering from the dismal period in 2008 and 2009. Because car sales collapsed during the recession, rising demand for new cars is likely to continue. “Cars have a limited useful life,” says Fritz Meyer, an independent economist, “and the age of the fleet should propel new sales in the months ahead.”

Housing Starts have rebounded strongly since the recession. The U.S. population increases by about three million a year, according to the U.S. Census Bureau. As a result, the nation needs about 1.5 million housing starts annually, Meyer says. In the years leading up to the recession — the housing bubble of 2005 and 2006 — housing starts soared to nearly two million. After the bubble burst and the recession took hold, housing starts plunged in 2009 to a low of about 400,000 annually. Since then, however, a recovery has pushed the rate to about 700,000 housing starts. Mortgage Bankers Association forecasts, along with the long-term population growth trend, support the case for a continued recovery in housing.   

Household Balance Sheets are about as strong as ever. The Federal Reserve’s financial obligation ratio, which measures consumers’ fixed expenses compared to disposable income, has fully recovered since the recession. At 16%, households have 84% of after-tax income with which to make purchases.

“Consumers’ ability to cover their monthly ‘nut’ has seldom been better,” according to Meyer. “As incomes have recovered, household debt has been reduced and interest rates remain low.” 

The financial obligations ratio consists of estimated required payments on outstanding mortgage and consumer debt plus automobile lease payments, rental payments on tenant-occupied property, homeowners’ insurance and property tax payments divided by disposable personal income.

The data on the top two income quintiles does not address whether wealth in America is more concentrated. But it does debunk the myth that the top 1% controls the American economy. It also shows, unfortunately, that individuals in the lowest income quintile are finding it difficult to meet expenses. Still, it is comforting to know that the nation’s economy and the rise in corporate earnings behind the stock market’s three-year rebound are driven by a broad demographic group, and their ability to continue to fuel a slow-growth recovery appears fundamentally sound.

This article was written by a professional financial journalist for Legend Financial Advisors, Inc. and is not intended as legal or investment advice.

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