Hit on the Middle Class: My Thoughts and Observations

This concludes our review the Federal Reserve Bulletin for June 2012 on Family Finances

Most of the posts for the past two weeks contained quotes and summaries from the Federal Reserve’s report Changes in U.S. Family Finances from 2007 to 2010: Evidence from the Survey of Consumer Finances.  I would like to share my thoughts, observations, and cautions in today’s post. I hope not to offend, but pray that I can voice the good, the bad, and worrisome.

The Good

I see several good trends and hope they continue in spite of possible changes in the future economy:

• Families reduced debt and spending on debt. While consumer-based economies encourage spending and frequent updating of electronics, cars, and more; I hope that we continue avoiding debt. Credit card debt also decreased.
• Family savings inched upward. I also commend this trend and hope to see it increase. I feel we must save our money for emergencies, family events, education, and future purchases.

The Bad

Many of the factors that impacted family finances negatively originated long before the economic crash in 2008:

• Incomes failed to keep up with cost of living increases for a decade and a half. The economy indicates this trend will continue for the short-term. In addition, I doubt that salary decreases made for the recession will return quickly. 
• Unemployment rose more than 4% leaving hundreds of thousands without income. We still do not know how many of the jobs will come back.
• Housing values plummeted reducing family assets. Housing prices inflated beyond incomes and sustained value. An increasing appetite for bigger and more luxurious homes spurred the housing bubble which collapsed. Hopefully, we learned from the mistake and do not continue building and buying bigger homes than we need.

The Worrisome

The following indicators worry me:

• Debt-to-asset ratio increases jeopardize future security. Continued home-equity loans and debt consolidating refinancing will prevent improvement.
• Retirement accounts and savings share mixed messages. More people contribute to pension savings and accounts. Contributions fail to meet full vesting.

Wednesday I would like to share a few thoughts on today’s job market and the economy

Hit on the Middle Class: Summary of Family Finances

This continues our series on challenges facing the middle class
“The Federal Reserve Board’s Survey of Consumer Finances for 2010 provides insights into changes in family income and net worth since the 2007 survey. The survey shows that, over the 2007–10 period, the median value of real (inflation-adjusted) family income before taxes fell 7.7%; median income had also fallen slightly in the preceding three-year period. The decline in median income was widespread across demographic groups, with only a few groups experiencing stable or rising incomes.”
Family Assets

• Financial assets rose as a share of total assets, reversing an earlier trend
• Decline in the share of nonfinancial assets was most strongly driven by the decline in real estate prices and the value of business equity
• Homeownership rate continued to trend downward retracing the path to the level seen in 2001
• Declines in unrealized capital gains were an important part of the decrease in assets
• 24.5% decline total assets were attributable to unrealized capital gains a share more than 11% points below that in 2007

Family Debt

• Debt fell more slowly than assets over the recent three-year period
• Overall indebtedness as a share of assets rose markedly
• Home-secured debt fell slightly as a share of total family debt, but remained the largest component
• Families using credit cards for borrowing dropped over the period; the median balance on their accounts fell 16.1 percent, and the mean fell 7.8 percent
• Education-related borrowing increased as the fraction of families with education-related debt rose from 15.2% to 19.2%
• Mean balance among those with education debt rose 14.0%, the median by 3.4%
• Declining consumer loan interest rates helped offset the fact that debt rose relative to income for many families.
• Median ratio of loan payments to family income for debtors fell slightly over the period to 18.1%
• Debtors with loan payments exceeding 40% of their income decreased 1.0%
• Share of families with payment ratios this high peaked at 14.8%
• Fraction of debtors with any payment 60+ days past due climbed from 7.1% to 10.8%

Monday I will share my thoughts on the report of family finances

Hit on the Middle Class: Liabilities to Family Finances

This continues our series on situations challenging the middle class and others

Changes in U.S. Family Finances from 2007-2010: Evidence from the Survey of Consumer Finances reported “The overall value of families’ liabilities decreased between 2007 and 2010, but the rate of decline was less than the corresponding rate for families’ assets. Accordingly, the ratio of the sum of the debt of all families to the sum of their assets—the leverage ratio—rose from 14.8% in 2007 to 16.4% in 2010. The leverage ratio for the subset of families that had any debt rose at a faster pace, from 19.4% in 2007 to 22.0% in 2010.”

Liabilities

Several factors increase the liabilities family finances incur today (We reviewed some of them in blogs over the last two weeks):

• Holdings of Debt
• Mortgages and Other Borrowing on the Primary Residence
• Borrowing on Other Residential Real Estate
• Installment Borrowing
• Credit Card Balances and Other Lines of Credit
• Other Debt
• Reasons for Borrowing
• Credit Market Experiences
• Debt Burden

Liability of Debt (a reprise)

• Proportion of debtors with payments exceeding 40% of their previous-year income fell 1.0% to 13.8%
• In the preceding three years, the proportion had increased 2.5%
• Families in the bottom net worth group the share rose 4.2%
• Families with income between the 60th and 80th percentiles saw a 1.9% decline in the fraction exceeding the 40 percent mark
• Those between the 80th and 90th income percentiles saw a 2.9% point decline
• Home-secured debt fell slightly as a share of total family debt, but remained the largest component of family debt.
• Borrowing for residential real estate other than the primary residence fell slightly, but in 2010 it stayed high by historical standards.
• Percentage of families using credit cards for borrowing dropped over the period
• Median balance on their accounts fell 16.1%, and the mean fell 7.8%
• Families with education-related debt rose from 15.2% to 19.2%
• Mean balance among those with such debt rose 14.0%, the median balance increased 3.4%

Friday we will review the summary of findings that challenged the middle class

Hit on the Middle Class: Retirement Investments

This continues our series on changes in the middle class from 2007-2010

The June 2010 Federal Reserve Bulletin listed Changes in U.S. Family Finances from 2007-2010: Evidence from the Survey of Consumer Finances reported “The share of financial assets held in retirement accounts has nearly doubled since 1989, and as of 2010, it stood at 38.1% of families’ financial assets.”

Tax-Deferred Retirement Assets

“Ownership of tax-deferred retirement assets such as personally established individual retirement
accounts (IRAs) or job-based 401(k) accounts tends to increase with families’ income and net worth…Ownership is also more likely among families headed by a person less than 65 years of age than among the older groups.

• Retirement accounts have been increasingly prevalent in the past 30 years
• May not be available until relatively late in the careers of many older persons
• Beginning at age 59½ a person may withdraw, without penalty
• Some in the two oldest age groups may have already done so.
• Families used funds from retirement accounts to purchase an annuity at retirement”

Statistical Analysis

• From 2007 to 2010, the fraction of families with retirement accounts fell 2.6% to 50.4%
• The decrease offset most of the 3.1% point increase over the preceding three years
• Overall rate of retirement account ownership varied around 50% for the past decade.
• 85.4% of families with an account plan on a current job a decline of 1.8%  from 2007.
• 91.9% of families with such plans made contributions, an increase of 0.5% from 2007
• The median annual contribution by employers who contributed $2,300 in 2010
• Median contribution by families who contributed was $3,000
• Both amounts were little changed from 2007 levels
• Eligibility of heads of families to participate in any type of job-related pension fell from 55.9% in 2007 to 52.9% in 2010
• It had risen 1.1% over the preceding three years
• Participation by eligible workers is usually voluntary
• 84.3% of family heads who were eligible to participate did so, up from 83.8% in 2007
• The choice to participate appears to be related strongly to income

Wednesday we will review liabilities related to family finances from 2007-2010

Hit on the Middle Class: Financial Assets & Stocks

This continues our series on economic changes affecting the middle class

Changes in U.S. Family Finances from 2007 to 2010: Evidence from the Survey of Consumer Finances published by the Federal Reserve Board declared “From 2007 to 2010, median assets for families having any assets fell 19.3%, from $232,100 to $187,200, and the mean fell 12.8%, from $702,100 to $612,300.” (p23).

Financial Assets

“Although the overall ratio of financial assets to total assets rose over the recent period, that
increase is attributable to the relatively larger declines in the value of nonfinancial assets;

• Median holding of financial assets for families having such assets fell 28.8 percent, while the mean fell 3.3 percent.
• Recent change in the median erased the gains experienced in the previous three-year period (2004 to 2007) and left median financial assets at their lowest level since the 1995 survey.
• The decline in median financial asset holdings was widespread across demographic groups, with gains observed for
• Families headed by someone 75 or older,
• Top 10 percent of families ranked by income
• Top 10 percent of families ranked by net worth.”

Publicly Traded Stocks

“The direct ownership of publicly traded stocks is more widespread than the direct ownership
of bonds, but, as with bonds, it is also concentrated among high-income and high-wealth
families.

• Families with any such stock holdings declined 2.8% from 2007 to 2010, to 15.1%
• Declines in ownership were more common than increases, with the noticeable exception of families in the top decile of net worth, for whom ownership rose 2.5%
• Ownership also rose slightly for families in the top decile of income (by 0.3%) and for families headed by a person who was self-employed (by 0.2%)
• Although the major stock price indexes decreased about 25%, the median amount of directly held stock for families with such assets rose 12.4% (the mean fell only 9.5%)
• For 35.5% of stockowners in 2010, at least one of the companies in which they
  owned stock was one that employed, or had employed, the family head, spouse or partner

Monday we discuss retirement accounts listed in the Federal Reserve’s Report

Happy 4th: Life, Liberty, & the Pursuit of Happiness

This post celebrates the birth of a nation dedicated to opportunity and liberty

I love the United States of America! I’ve visited, lived and worked in more than 30 countries on 5 continents. I appreciate their unique cultures, people, and opportunities. I recognize that the USA does not have a corner on freedom, rights, or moral integrity. Other countries also provide citizens the same benefits. I still love the United States of America.

Our Unalienable Rights

The Declaration of Independence states “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.”

That phrase changed a country’s attitude toward people’s opportunity to grow. Prior to that statement, societies around the world defined class societies that restricted upward movement. The merchant class in England would not confront the landed aristocracy for another 50 years. France’s revolution would violently follow the concepts outlined in the declaration 15 years later.

The unalienable right to life, liberty, and the pursuit of happiness guaranteed each citizen the opportunity to improve their life, their status, and their career.

Millions of people proved that promise over the past two centuries

• Immigrants with names like Carnegie, Mellon, and Vanderbilt proved it
• Others with names like Ford, Rockefeller, Gates, and Jobs also proved it
• Hundreds of thousands of my clients proved it by improving their jobs and lives
• Thousands of clients proved it by starting or improving businesses
• Hundreds of personal friends and family moved from middle to upper class

I Worry About the Promise

The promise still eludes millions. Some people, because of race, immigration status, or poverty fail to gain the “American Dream”.  Injustices and inequalities permeate our history.

Today, forces jeopardize the guarantee. Our society, more than in 100 years, consists of haves and have not’s. The middle class shrinks more each year. Legislation and litigation makes what once seemed unalienable indefensible. We must preserve the promise.

Friday we will continue our series on the middle class reviewing stocks & investments

Hit on the Middle Class: Debt Provides Mixed Message

This continues our series on financial stress affecting the middle class

The Federal Reserve Bulleting, June 2012 released the Fed’s report on Changes in U.S. Family Finances from 2007 to 2010: Evidence from the Survey of Consumer Finances. It summarized “Total payments relative to total income increased only slightly, and the median of payments relative to income among families with debt fell after having risen between 2004 and 2007. The share of families with high payments relative to their incomes also fell after rising substantially between 2001 and 2007.”

Debt Ratio Increases While Actual Debt Decreases

The following points indicate a small improvement on our hunger for debt, but also indicate an increase in debt ratio:

• “Share of outstanding credit card balances decreased 0.6% over the 3-year period.”
• “Offsetting these relative declines in mortgage and credit card debt were increases in the share of liabilities accounted for by nonmortgage lines of credit and other installment loans.”
• “The overall value of families’ liabilities decreased between 2007 and 2010,
• “But the rate of decline was less than the corresponding decrease of assets.”
• “Accordingly, the ratio of the sum of the debt of all families to the sum of their assets—the leverage ratio—rose from 14.8% in 2007 to 16.4% percent in 2010.”
• The leverage ratio for the subset of families that had any debt rose at a faster pace, from 19.4 percent in 2007 to 22.0 percent in 2010.

Demographic Allocation of Debt Looking Better

“With few exceptions, the fraction of families with any debt fell broadly across demographic
groups.”

• Debt ownership
• Fell for those in the less than 35, 45-to-54, and 55-to-64 age groups
• Rose for the 75-or-older group.
• Families headed by a self-employed person saw a decrease of 4.8%, but more modestly or increased among complementary work-status categories.
• Median debt tends to rise with income, education, and wealth;
• Debt fell 17.8 percent among families headed by a person who worked in a technical, sales, or service job

Wednesday we remember our right to life, liberty, and the pursuit of happiness