In a recent issue of New York magazine, dubbed “The Money Issue,” one of the most popular stories is titled The Catastrophist View, in which Peter Schiff, a brokerage president from Darien, Connecticut (and no relation to me), describes five threats to the U.S. economy that could send it into a “free fall.” One of those threats enumerated by Schiff, who goes by the nickname “Dr. Doom” on CNBC: “Consumers Run Out of Steam (and Take the Economy Down With Them).”
The article’s author, Duff MacDonald, writes, “70% of the [U.S. economy's] gross domestic product is accounted for by consumer spending.” What if, he posits, consumer spending is slowed down by rising interest rates and a troubled economy? He cites a recent study which points out that six in ten households have enough savings to last them three months if they were out of a job. A more nuanced explanation would take the air out of the coming catastrophe.
In a recent study Russ Prince and I conducted for our upcoming book The Middle-Class Millionaire (Doubleday, February 2008), we compared responses between households with a net worth of $1 million to $10 million, which we called “Middle-Class Millionaires” and households with incomes between $50,000 and $80,000 ($50,000 being the median income in America), which we called “middle-class.” When asked how long they could “maintain their current lifestyle without their current income,” the middle-class household said 4.4 months on average. When we asked the Middle-Class Millionaire the same question, they responded 18.8 months.
How big an impact do affluent households have on the economy? According to the Bureau of Labor Statistics, the top 20% of households in income are responsible for about 60% of consumer spending. In other words, a minority of households in America is responsible for a majority of consumer spending and those households report they can withstand economic disruption up to four times longer than the average middle-class household. This is increasingly described as the “plutonomy” in which the affluent drive the overall consumer economy.
To this I would add the phenomenon we dubbed the “influence of affluence” in which the Middle-Class Millionaire market is at the top of an innovation pyramid that leads to new products and services made available at more affordable prices (think GPS—once costing several thousand dollars, now a few dollars each month in your cell phone) and you’ve got a substantially different “fact set” than the one described in this article. The coming catastrophe might have to go on without consumers.
That leaves only four catastrophic threats to contend with. New York magazine will have to find other Schiffs to address those.
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