Class in the US... the fifth conclusion

5Over the years, certain demographic groups have fared better than others in moving up the economic ladder. Since 1971, older Americans (ages 65 and older) and African Americans have made notable progress in moving up the income tiers. But overall, both groups are still overrepresented in the lower-income tier. Married adults also made significant progress over this 44-year period, and women overall made greater economic gains than men.

Americans without a college degree stand out as experiencing a substantial loss in economic status since 1971, as do young adults ages 18 to 29. Hispanics overall are also more likely to be in lower-income households than in 1971, a change driven by the increasing share of immigrants in the Hispanic population in the past four decades.

http://www.pewresearch.org/fact-tank/2015/12/10/5-takeaways-about-the-american-middle-class/

Class in the US... the fourth conclusion

4The share of U.S. aggregate household income held by middle-income households has plunged, from 62% in 1970 to 43% in 2014. Meanwhile, the share held by upper-income households increased from 29% to 49%. This shift is driven both by the growing size of the upper-income tier and more rapid gains in income at the top.

There is also a growing disparity in the median wealth (assets minus debts) of these income tiers. Upper-income families, who had three times as much wealth as middle-income families in 1983, more than doubled the wealth gap to seven times as much in 2013.

http://www.pewresearch.org/fact-tank/2015/12/10/5-takeaways-about-the-american-middle-class/

Class in the US... the third conclusion

3Over the long haul, America’s middle-income households have seen their income grow. From 1970 to 2014, these households’ median income increased from $54,682 to $73,392 (in 2014 dollars), a gain of 34%. Lower-income household incomes have grown, too, but not as much: 28% over the same 44-year period. Upper-income household incomes have grown most, up 47% over this period.

However, the nation’s economic progress over the past several decades masks financial setbacks since 2000. Because of the recession in 2001 and the Great Recession of 2007-09, overall household incomes fell from 2000 to 2014. The greatest loss was felt by lower-income households, whose median income fell 9% over this period; the median for middle-income households fell 4%, and that for upper-income households fell 3%.

http://www.pewresearch.org/fact-tank/2015/12/10/5-takeaways-about-the-american-middle-class/

Class in the US... the second conclusion

2The decline in the middle represents both economic progress and polarization. The shift shows progress in the sense that a larger share of Americans now live in upper-income households. Fully 21% of American adults in 2015 were upper income, compared with 14% in 1971, a 7-percentage-point increase. The increase in the share of upper-income adults was greater than the change in the opposite direction. Some 29% of U.S. adults were low income in 2015, compared with 25% in 1971.

But the data also show increasing economic polarization: As the distribution of adults thins in the middle, it is bulking up most at the extreme ends of the income distribution, the lowest and highest tiers.

http://www.pewresearch.org/fact-tank/2015/12/10/5-takeaways-about-the-american-middle-class/

Class in the US...

The first of five major conclusions from a fascinating study by the respected Pew Foundation...

1Middle-income Americans are no longer the nation’s economic majority. In early 2015, there were 120.8 million adults in middle-income households, matched in number by the 121.3 million adults who were in lower- and upper-income households combined.

This is the culmination of a long slide in which the share of adults in middle-income households has fallen from 61% in 1971 to 50% in 2015.

http://www.pewresearch.org/fact-tank/2015/12/10/5-takeaways-about-the-american-middle-class/

Mexico's oil trade surplus: going, going, gone...

Mexico’s oil trade surplus has vanished. It maxed out at US$19.4 billion in 2006, falling into single digits in 2013 for the first time in eleven years. The decline became a rout last year when the oil surplus plunged to just US$1.1 billion. In the first nine months of this year, the surplus turned into a US$7.0 billion deficit. It’s the first deficit in central bank's oil trade balance series that begins in 1993.

Where's the risk in the international financial system?

Per former Fed Chairman Ben Bernanke (quoted in the October 28 New York Times), the risk to financial stability today comes from emerging markets. In a talk at the London School of Economics, Bernanke highlighted emerging markets and how they react to higher interest rates in the US as a "risk area". The magnitude and nature of that risk is hard to know, he cautioned.

What an independent member of Pemex's Board of Directors has to say...

Here's the conclusion, roughly translated from the Spanish:

"The blame for the risk Pemex face today are decades of corruption and bad administration, from the inefficiencies of a monopoly and the wasteful spending of the oil bonanza by federal, state and local governments. The Energy Reform gives us the opportunity to tackle the drop in oil prices. It will require an enormous effort by everyone. It's an effort that can't be postponed."

Carlos Elizondo's article is well worth the read. Here's the link:
http://www.excelsior.com.mx/opinion/carlos-elizondo-mayer-serra/2015/09/03/1043729

Surprised the peso has been devaluing?

After looking at the numbers on portfolio investment in Mexican money market instruments in the first six months of this year, you won't be. Foreign investment in money market instruments came to a barely discernible US$0.9 billion, down from US$10.8 billion in the first six months of 2014. Portfolio investment in money market instruments in each of the first two quarters of this year was the lowest it’s been in any quarter since 2009.

Any bets on what the numbers will look like for the third quarter?

A slow motion devaluation...

The following graph charts the average monthly exchange rate as well as the minimum and maximum rates in each month since January 2007. The picture speaks for itself...

What will it take to boost Mexico's growth rate?

Mexico's central bank, Banco de Mexico (Banxico) had something to say about that it in its most recent Quarterly Report on Inflation, released yesterday. Banxico's reduction in this year's projected growth to 1.7% - 2.5% (down from 2.0% - 3.0% three months ago) captured the headlines. But it's the final paragraph of its two page summary of the report that is what's really important. Roughly translated, Banxico's Governors warn:

"... Mexico must undertake additional efforts to strengthen its institutions and the rule of law since, for example, the lack of public security has negative effects on confidence, inhibits the efficient allocation of resources in the economy and complicates economic growth. To the extent that Mexico moves in this direction, it will be possible to detonate the economy's potential growth rate in a context of low inflation and financial stability." (underlining mine)

The drop in the peso...

The average monthly cost of a dollar has risen each month for over a year. In July 2014, the fix rate averaged $12.98. In the first six days of August of this year, it's averaged $16.24. That's a 20% jump in the cost of a dollar.

There hasn't been a panic, testimony to the effectiveness of a flexible exchange rate regime.

Some facts about income in Mexico...

The average Mexican household’s monthly income was just Ps$13’240 last year (US$995 at the average 2014 fix exchange rate). The average obscures wide disparities: the income of the bottom 10% of households averaged Ps$2’572 a month (US$193) while that of the top 10% averaged Ps$46’928 (US$3,527). 

Just over half – 51% -- of income went to the top fifth of households last year. The bottom 50% of households (deciles I – V) received just over a fifth (20.8%) of income. The sixth, seventh and eighth deciles received 28% of income.

Wage growth and productivity: the US experience

Increasing productivity is the key to raising wages -- at least, it's supposed to be. A very informative graph published in the July 17 New York Times (see the link: http://www.nytimes.com/2015/07/15/business/sizing-up-hillary-clintons-plans-to-help-the-middle-class.html?ref=international) suggests that the longstanding relationship has fallen by the wayside. Since the 1970's, wages have stagnated in spite of rising productivity.

At the same time, economic research comparing what happens when a state raises the minimum wage and its neighbor doesn't has demonstrated that raising the minimum wage doesn't have to mean fewer jobs. It appears that the direct effect of higher labor costs is offset by better morale, reduced turnover and increased productivity...

When can a central bank stand against the markets?

What central bank can hope to fight off successfully a run against its currency? Maybe the Chinese central bank: the country's US$3.8 trillion in reserves gives it a fighting chance at beating off an attack. To put the number in perspective, that's more than three times Mexico's GDP. It's also a sixth of total world reserves.

While Chinese exporters would be happy with a weaker renminbi, Chinese companies and banks have borrowed an estimated US$1 trillion over the last five years, mostly dollar-denominated, short-term loans. They certainly aren't happy with a depreciating renminbi.

Mexico has run sizable capital account surpluses in recent years, which the peso's movements have reflected. In 2013, US$64 billion of capital flowed (net) into Mexico; in the first nine months of 2014, net capital inflows were US$40 billion. Capital flows are a different order of magnitude in China. In the fourth quarter of 2014, capital outflows from China were US$96 billion!

The same is true of the two countries' tourism position. Last year, Mexico posted a record US$6.6 billion surplus in the tourism account. In the fourth quarter of 2014, China ran a US$36.4 billion deficit in its tourism account.

Not only did Banco de Mexico reduce its growth forecast...

Yesterday, Mexico's central bank cut its projection for this year by half a percentage point, to 2.5% - 3.5%.

More telling was the concluding paragraph of the summary of the bank's quarterly analysis, which baldly stated that macroeconomic stability isn't enough to improve societal well-being. "Adequate implementation of structural reforms is indispensable" if Mexico is to be more competitive and productive and the domestic economy, a more important motor of growth.

The eye-opener was the Bank's ringing endorsement of the rule of law: "It is of the greatest importance to work on the institutional transformation of the country, in order to build a more solid rule of law and create greater judicial certainty for society." 

What's middle class?

Income isn't the only way to define "middle class". Education is another. Aspirations are as well. Last week's blog took a look at the evolution of the US middle class -- defined as a household earning between US$35,000 and US$100,000 a year.

I thought it would be interesting to see to which income decile a Mexican household with that income would fall. Here are the numbers for 2012, the most recent year available from INEGI.

Households earning US$32,037 a year were in the top 70% of the income distribution in Mexico. Household income of US$40,857 were in the top 80% while US$56,329 were in the top 90%. Household income for the top 10% averaged US$123,587.

The American middle class...

A fascinating look (in graphs) at the composition of the middle class in the US between 1967 and 2013... Until 2000, the middle class declined because people were moving into the upper class. Since 2000, movement into the lower class drove the shrinkage of the middle class. See:

http://www.nytimes.com/interactive/2015/01/25/upshot/shrinking-middle-class.html?abt=0002&abg=1