U.S. Regional Income Inequality Hits All-Time High

by the Curmudgeon with Victor Sperandeo


The Bottom Line:

A front page Financial Times article from yesterday notes that the income gap between the richest and poorest U.S. metro areas (of the 100 largest in America) has reached its widest on record.  The so called "recovery" from the 2008-2009 financial crisis/ great recession has resulted in income disparity that has reached its most unequal level since data collection began 45 years ago. 


The FT article says that a report by the U.S. Commerce and Labor Department measured income in each of the 100 largest metropolitan areas by population.  That data was analyzed for the Financial Times by property website Trulia1, which found the income disparity between the 10th most expensive region and the 90th by home prices in 2013, hit its widest since records began in 1969. 


Boston, which is the 10th richest metro area in the U.S., had a per-capita income 1.61 times greater than Cincinnati, which is in 90th position. The previous lowest gap was in 1976, when San Francisco was 1.36 times better off than El Paso, according to the FT article. 


Chart Courtesy of the Financial Times


Note 1.  We could not find the referenced report or analysis on either Trulia or the U.S. Commerce or Labor Dept. websites.  We did find some U.S. metro region statistical income data from 1969 till 2012 at this link.  Tables can be downloaded in either pdf or xls format. 


Curmudgeon's reaction: Yawn....zzzzzz's. What else is new? See Victor's comments below. 


This should not come as a surprise to CURMUDGEON readers.  We've been stating for years that the economic recovery is strictly limited to the top 1% of income earners, with everyone else left in the dust and many living paycheck by paycheck, struggling to make ends meet.


Matthew Klein of FT Alphaville found that "the two metro areas (as of 2012, the latest year for which statistics are available) with the highest personal incomes per person derive their prosperity from oil (Midland, TX) and finance (Bridgeport-Stamford-Norwalk, CT). The third and fourth spots belong to the adjacent tech hubs of San Francisco and Silicon Valley (nominally Santa Clara and some parts of San Mateo counties).  For the most part, the metros that had the highest incomes in 1969 (when the data begin) were also the ones with the highest incomes in 2012."




The huge income gap has fueled policy makers’ concerns about an uneven housing recovery which threatens to hold back the broader revival of the U.S. economy.  In Austin, Texas for example, a surge in technology jobs has driven demand. But in Akron, Ohio, which is struggling to boost employment through a new manufacturing base, house purchases have been more muted. In California's state of capital of Sacramento, anxious homebuyers are waiting on the sidelines after being priced out by investors who buy real estate to rent and/or re-sell.


“Housing markets are playing out at very different speeds partly as a result of the lack of geographical breadth in the labor market. Certain sectors of the economy are performing better than others, propelling some housing markets over others,” said Fannie Mae Economist Mark Palim.  


Stanley Fischer, Vice Chairman of the Federal Reserve, said in a speech this Monday in Stockholm, Sweden:


“The housing sector was at the epicenter of the US financial crisis and recession and it continues to weigh on the recovery...This pattern of disappointment and downward revision [in growth] sets up the first, and the basic, challenge on the list of issues policy makers face in moving ahead: restoring growth, if that is possible.  It is also possible that the underperformance reflects a more structural longer-term shift in the global economy, with less growth in underlying supply factors.”


In contrast to previous U.S. recoveries, he noted that “residential construction [has been] held back by a large inventory of foreclosed and distressed properties and by tight credit conditions for construction loans and mortgages.”


We've pounded the table for months that there has been little growth for lower and middle class wage earners, which constrains demand for houses and big ticket items across much of the U.S.  We think part of that is due to employers hiring more part-time workers (=less full time workers) which are not subject to mandatory ACA health insurance premiums.


The rebound in construction spending has been led by apartments and has been concentrated in pockets of the country where incomes are among the highest.   Six of Trulia’s 10 highest-income areas – including San Jose, Boston and New York – also had the strongest residential construction performance by permits in 2013 compared with past norms.


New corroboration of our thesis was reported today (Wednesday) by the Mortgage Bankers Association (MBA) that total home loan applications fell by 2.7% in the latest week. The refinance index fell by 4%, while the purchase index declined by 1%. The MBA said that the 30-year fixed rate with conforming loan balances was at 4.35%, near a 12-month low.  That doesn't augur well for future home sales!


Enrico Moretti explains in The American why policymakers should concentrate on mobility inequality to close the income gap:


"Economic differences across American cities (for example, unemployment rates and salary levels) are very large and keep growing. These growing differences mean that the economic returns to economic mobility have never been higher. But not all American workers are equally mobile. College graduates have the highest mobility of all, workers with a community college education are less mobile, high school graduates are even less, and high school dropouts come at the bottom of the list."


"Differences in geographical mobility, coupled with increasing polarization among American cities, exacerbate income differences across education groups.  Indeed, if the less educated people were more able and willing to move to cities with better job opportunities, the gap between college graduates and high school graduates would shrink."


Victor's Comments:

The different metro area housing prices, i.e. "inequality in the regions," were greatly affected by the stupendous increase in value of financial assets.  The bear market low (3/9/09) for stocks, as measured by the Wilshire 5000 Total Market Index, was $6,858.4 trillion.  Today that same index has almost tripled to $20,188.2 trillion.  Stock holders had no problem in capitalizing on this reward given to it by the Fed's printing press, which created a "free money party" on Wall Street.


Oil produced in Texas also did very well as did participants in the energy industry.  On 2/12/09 April West Texas Crude Oil futures closed at $33.94.  Today, September Crude Oil futures closed at $97.43 -- almost a tripling in price.


What is amazing is the fact the government has not changed fiscal or monetary policies that are keeping GDP and median income growth very low.  Also, "Dodd Frank" rules and regulations have been a disaster in not allowing most people to obtain loans for mortgages.  In fact, middle class folks have had a terrible time trying to buy a house.  They often compete with hedge funds and private investors that are buying houses for all cash- to either rent out or "flip" to sell at a higher price.


During and after the great recession, the $3000 maximum capital gains tax loss deduction per year (taken on the loss of a house or other assets) wiped out the equity of a huge amount of middle class people.  With their savings severely depleted or gone, and new jobs hard to come by, the middle class got poorer.  Most didn't own financial assets, so (unlike the rich) they didn't profit from the Fed's money printing, which artificially inflated stock and bond prices.


Yet our government does not change.  Why not? It may be that the people who elected this crop of politicians have been harmed the most while many who voted against them have gained the most. Welcome to the "New America."


Till next time........................


The Curmudgeon

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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