Middle-class Americans are falling behind

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America’s middle class is feeling the heat from sky-high interest rates and persistent inflation.

Middle-class income growth has lagged behind that of the upper class since 1970, according to a Pew Research Center report published May 31. The report defines middle-income households as having incomes that are two-thirds to twice that of the US median household income. The income figures are adjusted for household size.

Now, the cost-of-living crisis is exacerbating that long-term squeeze.

“The economy is booming, and yet many Americans are still gasping for air financially. They simply don’t have the breathing room to plan beyond their present needs,” said Jennifer Jones Austin, co-chair of the National True Cost of Living Coalition, in a release.

There are signs that middle-class Americans are dialing back their spending. Fast food joints, a mainstay dining destination for middle-income consumers, are leaning into discounts to placate frustrated diners. That comes after restaurants raised their menu prices as inflation soared, betting that customers would still be willing to spend. But that wager soured as diners tightened their purse strings, leading to less foot traffic and lower sales for fast food chains.

Target, which has a core middle-class customer base, reported in May that sales at stores open for at least a year dropped 3.7% during its latest quarter from the prior year. That marked its fourth consecutive quarter of sales declines. Kohl’s that same month reported weak first-quarter results, underlining how middle-income consumers are pulling back spending on non-essential clothing and discretionary merchandise at department stores.

“Our customers continue to be pressured by a number of economic factors, including high interest rates and inflation,” Kohl’s CEO Thomas Kingsbury said on a May 30 call with analysts. “Our middle-income customer continues to be impacted.”

Economic data and corporate earnings reports have shown that lower-income consumers are struggling to pay their bills on time, reducing their spending and searching for deals. Wealthier Americans, who have helped support the economy’s strength through high interest rates, are also starting to reel in their purchases.

There are other signals that many consumers are facing financial woes. US home prices are at record highs. Americans are racking up debt and running low on savings accumulated during the height of the Covid-19 pandemic. Thousands of corporate layoffs have some Americans struggling to make ends meet saying they feel as though they are living in a recession.

Americans have for months grappled with a divergence between the way they feel about the economy and how the economy looks on paper. But cooling economic data has begun to narrow that gap. US job growth slowed considerably in April, with just 175,000 positions added after a slew of piping hot jobs reports. Activity in the US manufacturing sector continued to contract in May. Data released Tuesday revealed that the number of US job openings shrank for the second straight month in April, setting a new three-year low.

Wall Street will get its next look at the state of the economy on Friday when the Bureau of Labor Statistics reports payroll figures for May.

Why India’s election shock won’t derail its economic boom

Narendra Modi has declared victory in India’s election, but he’ll need the support of smaller parties to govern, a shock result that could make it harder for him to pass major economic reforms, reports my colleague Diksha Madhok.

India boomed during Modi’s first two terms as prime minister, leapfrogging the United Kingdom to become the world’s fifth biggest economy and growing by 8.2% in the last fiscal year.

But the new government will need to make more big changes to sustain that pace if India is to become an economic superpower and a manufacturing rival to China.

“With a more fragmented government, we believe policy making in general is going to become more difficult going forward,” said Peeyush Mittal, a portfolio manager at Matthews Asia, a San Francisco-based investment fund.

Experts have highlighted land reform as an example of policies that might now be tougher for Modi to implement. Companies face more barriers to accessing land in India than in China. It is also much harder to hire or fire workers.

India will need to address those issues if it is to capitalize on the massive rethink underway among companies on supply chains. International firms want to diversify their operations away from China, where they are threatened by rising tension between Beijing and Washington.

Despite the surprise electoral setback for Modi’s right-wing, Hindu-nationalist Bharatiya Janata Party (BJP), experts say the world’s fastest growing major economy will continue to live up to its billing.

“The Modi administration still has enough of a mandate to enact reforms that will keep potential growth at 6% to 7%,” Shilan Shah, an economist at Capital Economics, said in a note on Tuesday. “That would leave the economy on course to more than double in size over the next decade.”

Read more here.

What happened to the UK economy?

When UK voters elect a new government on July 4, the health of the world’s sixth-biggest economy will likely be the main factor in deciding the outcome, reports my colleague Hanna Ziady.

The Conservative Party of Prime Minister Rishi Sunak has been in office since 2010, a period that has included the twin shocks of a pandemic and war in Ukraine.

But the United Kingdom has also been held back by two self-inflicted wounds — deep austerity in the wake of the global financial crisis and the 2016 decision to quit the European Union, which raised new barriers to trade. Economic growth has been anemic in recent years, squeezing living standards and starving public services of funds.

In their first televised debate Tuesday, Sunak and Keir Starmer, the leader of the opposition Labour Party, clashed over Britain’s economic fortunes, taxes, immigration and the state of the National Health Service. The stakes are high: Opinion polls suggest the Conservatives are set to be booted from office, with Labour on course to win a UK election for the first time since Tony Blair took the party to victory in 2005.

Sunak pointed to rising wages and a strengthening economy as proof that his plan to “restore economic stability” is working. Starmer, meanwhile, attacked the Conservative Party for presiding over 14 years of economic decline.

Read more here.

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