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PNC Economist: Middle Class Pressures Should Subside As Employment Gains

Wednesday, June 18, 2014 at 5:20 PM

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Mekael Teshome (PNC)

The middle class still appears to be in a rough spot compared to before the Great Recession. Recent Census Bureau data show median household income has shrunk from about $55,000 to $51,000 now. One explanation is the loss of industries which pay better wages. To get an insight on this and other economic vital signs ideastream's Tony Ganzer spoke with Mekael Teshome, an economist with PNC bank.

The middle class still appears to be in a rough spot compared to before the Great Recession that began in 2007.  Recent data from the Census Bureau show that median household income has shrunk from about $55,000 to about $51,000 now.  One explanation is the loss of industries which pay better wages.  To get an insight on this and other vital signs of the economy ideastream’s Tony Ganzer spoke with Mekael Teshome, an economist with PNC bank.

TESHOME: “We lost a wide array of jobs, pretty much every industry except healthcare.  We haven’t been filling the hole back with well-paying jobs.  A lot of is service, leisure and hospitality, retail, those are lower-paying jobs, but the manufacturing jobs, the government jobs, the finance jobs that we lost, really are still in the negative.”

GANZER: “What does this do for consumer confidence and also consumer spending in general in the economy?”

TESHOME: “It dampens consumer spending, obviously.  If we look at spending it’s growing at a slower rate than we’re used to seeing.  But what’s interesting is that even though it has been slow, it has been resilient as well, remarkably so.  Some of the reasons for that include less debt overall, we have low interest rates, we have low inflation, and so consumer spending has been dampened but it hasn’t really been broken.”

GANZER: “Speaking of low interest rates, the Federal Reserve this week is wrapping up a two-day meeting about interest rates and the economy in general.  And one of the issues they’re looking at is long-term unemployment—whether the interest rates should ultimately rise, to combat inflation, or whether we need to really concentrate on long-term unemployment, what effect is this going to have on the economy?  Where do you fall in this debate about where rates should go and what needs to be done for those long-term unemployed folks?”

TESHOME: “Policy-makers now are really biased toward stimulating growth rather than fighting inflation.  There really hasn’t been a lot of inflation, in fact many are worried that it’s too low.  Although for those of us on Main Street we don’t have a problem with low inflation, but policy-makers really want to drive down that unemployment rate because we know it’s high, but inflation may or may not come around.  So that’s their focus.  We expect the Federal Reserve to unwind its quantitative easing program by the end of the year, but it will keep interest rates near zero for an additional year, so we’re really looking at 2016 when we really see interest rates rise.”

GANZER: “Is retirement savings another part of the collateral damage of the Great Recession and where we are now?”

TESHOME: “Right, so the easy money has affected those who are on a fixed income, but the biggest effect came from the drop in house prices and stock prices. Now the good news is stocks are back, and home prices are regaining strength.  So for retirees I think things are getting better, they did take a hit, but now I think many of them are getting back on their feet.”

GANZER: “When you look at something like home prices especially it depends on the region you are in.  And being in the Rust Belt, I’m curious…are we suffering more than other regions as kind of the stereotype of the Rust Belt lets on, or is it not so clear cut?”

TESHOME: “I think this area gets a worse reputation than it deserves.  In terms of housing, we’re actually a lot better off here than in other places like Florida.  We don’t have the boom and bust.  We didn’t have the huge price increases, we didn’t have the huge price decreases.  Steady as she goes.  Now, 3-4% appreciation in home prices shouldn’t be viewed as a negative thing.  We can’t compare with Miami or Las Vegas that have double digit increases and I think we’re better off that way.”

GANZER: “Do you think the pressure, especially on the middle class, is going to subside?”

TESHOME: “Yes I do.  It has been very rough for the middle class but things are getting better.  As the unemployment rate declines, as we get closer to full employment, which is about 5.5%, wages should start to pick up.  Things will still be pretty slow in terms of income, but this is temporary and this is not permanent, and we should see a pick-up as we get closer to full employment.”

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