Bifurcation of Demand in the U.S. Economy Leads to a Marketplace Shake-Up

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Sales of premium lagers have jumped 16 percent since 2007. Used car sales are experiencing a prolonged period of stagnation. Luxury retailer Neiman Marcus has increased revenue 33 percent since 2009. And last year, Albertsons acquired the supermarket chain Safeway.

A common thread sews together each of these seemingly isolated incidents: the bifurcation of demand in the U.S. economy. According to a January report in the Wall Street Journal, the emergence of a two-tiered U.S economy, in which wealthy households advance while middle-income Americans stagnate, is reshaping a variety markets ranging from housing to clothing to beer. As the middle-tier market falters, the low- and high-end markets boom, and companies must adjust to survive. In an attempt to remain competitive in a grocery market that is now dominated by high-end producers such as Whole Foods Market and bargain ones such as Kroger, the private equity group that owns Albertsons purchased the middle-tier Safeway Inc. to reduce costs and remain competitive with low price outlets. Similarly, middle-tier retailers such as J.C. Penney and Sears have faced falling demand.

As homes are generally among the largest purchases Americans make, the housing market serves as a prime example of the burgeoning two-tiered economy. According to the Wall Street Journal, last year, U.S. builders sold more homes priced above $400,000 than those below $200,000 for the first time in recent history. Although home sales last year were down 50 percent from their pre-housing bubble average in 2000 to 2002, the median new-home size topped a record 2,500 square feet. Luxury home building and home rentals—the high and low ends of the housing market—are booming, while sales to first-time homebuyers are floundering. In an attempt to adjust to the changes in demand, homebuilders such as Quadrant Home are switching from catering to entry-level buyers to marketing “Built Your Way” custom homes with vaulted ceilings and gourmet kitchens that sold for an average price of $420,000, according to the Wall Street Journal.

The creation of a two-tiered economy could stem, in part, from the Federal Reserve’s manipulation of interest rates to zero over the last six years. A report in the New York Post suggested that the Fed’s $4.5 billion bond portfolio has driven divisions in the credit markets. The persistent low-rate environment leaves less income for small savers, who constitute the majority of first-time homebuyers. In addition, well-connected businesses have gained access to cheap credit while small and new businesses are often unable to acquire loans under the new regulations designed to protect the post-2008 economy. Before-tax median family income has fallen five percent since 2010, while the top ten percent of earners saw an increase in earnings. Moreover, as the New York Post observed, issues such as a complex tax code and increases in government spending and government debt have exacerbated the burden on the middle class.

The dichotomy between a mediocre housing recovery and a strong stock market recovery has also widened the wealth gap between the upper and middle classes. While the middle class has much of their assets tied up in housing, the upper class has a greater proportion in the stock market. According to a report in the Washington Post, only 9.2 percent of the middle 20 percent of households own stocks, while nearly half of the top 20 percent does. As a result, the middle class missed out on the bull market of the last half-decade, and instead absorbed the full effects of the continued housing bust. With flat wages, the wealth of the middle class has continued to fall. And with little change in sight for the division between the upper echelons and the remainder of consumers, companies make adjustments: cater to the luxury crowd or to the budget consumers. There’s little to gain in between.

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