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					                                                                                 October 2012

Weakness Begets More Weakness
How does the US achieve a sustained recovery if “the 99%”
continues to suffer perpetual decline in real income?
By: Eric Sprott & David Baker

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Other than some obligatory arrests for disorderly conduct, the Occupy Wall Street movement celebrated its one
year anniversary this past September with little fanfare. While the movement seems to have lost momentum, at
least temporarily, it did succeed in showcasing the growing sense of unease felt among a large segment of the US
population – a group the Occupy movement shrewdly referred to as “the 99%”. The 99% means different things to
different people, but to us, the 99% represents the US consumer. It represents the majority of Americans who are
neither wealthy nor impoverished and whose spending power makes up approximately 71% of the US economy. It is
the purchasing power of this massive, amorphous group that drives the US economy forward. The problem, however,
is that four years into a so-called recovery, this group is still being financially squeezed from every possible angle,
making it very difficult for them to maintain their standard of living, let alone increase their levels of consumption.
One of the central themes that arose out of the Occupy movement was the growing sense of unease among the
average American citizen with regard to growing imbalances in wealth within the US. The rich are getting richer
while the poor get poorer. That feeling is entirely legitimate. According to the US Census Bureau, in 2011 the median
income of US households, adjusted for inflation, fell to $50,054. This is 4.9% below its 2009 level, and 8.9% below
its all-time peak of $54,932 in 1999.1 This is not encouraging data. It implies that the average American household is
almost 9% poorer today than it was thirteen years ago.
The Census Bureau data is even more troubling if one acknowledges that the Consumer Price Index (CPI) inflation
rate it uses to adjust annual income doesn’t properly account for food, energy or healthcare prices – all key inputs to
the average US consumer, and all items that have gone up considerably in price over the last decade, particularly since
the advent of quantitative easing. Under current CPI, the items pertaining to food, fuel and healthcare only make up
28% of the total basket.2 The average US family, however, especially among the 99%, is spending far more on these
three items as a percentage of their total income. Figure 1 below compares the average price of gasoline and select

1   Politi, James (September 12, 2012) “US median income lowest since 1995”. Financial Times. Retrieved on October 15, 2012 from:
2   U.S. Bureau of Labor Statistics (September 2012) “CPI Detailed Report”. Retrieved on October 20, 2012 from: |         weakness begets more weakness        |   october 2012                                                                        1
food items in 1999, when the average household made $54,932 in real terms (inflation adjusted), versus 2012, when
the average household made just over $50,000 in the same relative dollars. As can be seen, the increase in food and
energy has grossly outpaced the official CPI inflation rate, which conveniently dropped or shifted many of the food
and energy components back in the 1990’s. If the Census Bureau used a more appropriate measure of inflation to
compare the median household income in 1999 to today, it would result in an even lower annual income number,
implying an even worse decline in real wealth over that time period.

                                                                                               1999                              2011                    % Change
    Median Income US Households (Nominal)                                                   $40,696                           $49,103                            21%
    Median Income US Households (Inflation Adjusted using CPI)                              $54,932                           $50,054                             -9%
                                                                                               1999                         2012 Est.                    % Change
    Gal Gas                                                                                    $1.22                             $3.79                          211%
    Loaf of Bread                                                                              $1.49                             $1.88                           26%
    Gal Milk                                                                                   $1.50                             $2.79                           86%
    Lb Bacon                                                                                   $2.59                             $4.48                           73%
    Doz Eggs                                                                                   $0.89                             $1.54                           73%
    Lb Tomatoes                                                                                $1.21                             $1.79                           48%
    5 Lb Bag Sugar                                                                             $2.13                             $2.42                           14%
    Lb Ground Beef                                                                             $1.38                             $4.78                          246%
    Tide Soap Powder                                                                           $5.29                           $17.97                           240%
    Folgers Coffee                                                                             $3.41                             $8.98                          163%
    Cost to raise newborn to age 18                                                       $165,630                          $235,000                             42%
                                                                                                                            Average                             111%

Figure 2 below is courtesy of Shadow Government Statistics, and shows US Average Weekly Earnings adjusted for
inflation using two versions of inflation measurement. It is a sobering chart. The blue line shows inflation-adjusted
earnings using government CPI, and shows a small but steady increase in real earnings since the mid-1990s. The
green line, however, shows what inflation adjusted earnings would be today had the US Bureau of Labour Statistics
not made changes to the CPI in the early 90s, and reveals that average weekly earnings have actually been in
contraction for over 17 years.3 Forget blaming our current woes on the hangover from 2008-2009. The average
American worker has been losing income in real terms since the late 1990s. This is clearly a long-term trend which
has compounded itself over the last ten years. Weakness begets more weakness.

3      Williams, John (October 16, 2012) “September CPI, Industrial Production, Real Retail Sales and Earnings”. Shadow Government Statistics. Retrieved on October 21, 2012 from: |            weakness begets more weakness        |   october 2012                                                                                               2
Deflated by CPI-W versus SGS-Alternate (1990-Base)
To September 2012, Seasonally Ajusted (, BLS)


                               320                                                           SGS-Alternate CPI-W
  Constant 1982-1984 Dollars





                                  1964   1968     1972       1976        1980         1984     1988     1992       1996   2000   2004   2008   2012

Source: Shadow Government Statistics, October 16, 2012

Meanwhile, as the Occupy movement also repeatedly highlighted, the increase in wealth inequality within the US
has grown steadily over the past thirteen years. Figure 3 below shows the “Gini Ratio” of US household income,
which statistically captures income inequality within the country. A Gini Ratio coefficient of 0 corresponds with perfect
equality, while a coefficient of 1 describes a situation where one person has all the income, and everyone else has
nothing. As can be seen, a clear trend towards inequality has been in place since the late 1960s, and that trend
appears to be accelerating today. Just as weakness begets weakness, strength begets strength for those with
the most wealth.










Source: US Department of Commerce: Census Bureau |                         weakness begets more weakness   |   october 2012                                                             3
These two central tenets of the Occupy movement – that the rich are getting richer while the poor are getting poorer, are
the same tenets that are hindering a real recovery within the US. We simply cannot expect the US economy to grow if
the 99% are not generating more wealth and disposable income over time. Any discussion of a US recovery that doesn’t
acknowledge the deteriorating reality of this group is not an honest discussion in our opinion. And it’s only getting worse.
On top of consistently losing purchasing power to inflation over the past decade, the 99% is faced with a pronounced
deterioration in job quality (in terms of average salary), chronic youth underemployment, an inability of retirees to generate
income from savings, and a steady increase in outright poverty. Market pundits can get excited about a 1.1% increase
in September retail sales, but they can’t expect that increase to be sustainable unless we see some relief for the core
consumptive engine that ultimately drives those sales.
In this vein, it was very interesting to watch the reaction to the most recent US Bureau of Labor Statistics (BLS)
unemployment release on October 4, 2012, which optimistically reported US unemployment falling to 7       .8% – representing
the lowest level of unemployment since January 2009. Rather than elicit jubilation, the report prompted cynicism, most
notably from the former General Electric CEO, Jack Welch, who famously tweeted, “Unbelievable jobs numbers…
these Chicago guys will do anything… can’t debate so change numbers, immediately after the release.4 Welch’s tweet
elicited a torrent of defensive responses, most notably by the BLS who were outraged that anyone would question their
methodology. But it’s not the methodology that should cause concern (it is just a survey, after all, although continually
lowering the “participation rate” of the US labour force does deserve some eye-rolling), it’s the fact that the jobs numbers
are shrouding the painful reality of the post-2008 US labour market: that the jobs lost tend to be higher-paying, while the
jobs gained tend to be lower-paying.
It doesn’t take much to see this trend evolving. A cursory review of the most recent layoff announcements makes it fairly
clear what type of workers are being laid off in 2012:
“Bank of America slashing 16,000 jobs before December”5
“Pharmaceutical giant Merck to cut nearly 12,000 jobs”6
“Computer giant Hewlett Packard to slash 27 ,000 jobs by October 2014”7
“AMD Announces 15% Cut in Workforce”     8

Meanwhile, the new jobs allegedly responsible for lowering the unemployment rate tend to be coming from companies
seeking part-time workers, like, which announced that it will be hiring 50,000 part-time workers for the
holiday season.9 This is also reflected in the latest BLS report, which accounted for 582,000 of the reported 873,000
new jobs gained in September as “part-time for economic reasons”10 The reality is that were it not for those part-time
jobs gains, US unemployment would look dismal. Public hiring announcements by US companies have totaled a mere
84,937 workers for the first eight months of 2012, which is significantly lower than the 224,243 workers that were
announced for the same period in 2011.11 The BLS labour surveys don’t account for the difference between a Bank of
America job cut vs. an hire, but that’s the difference that has the biggest impact on the disposable income
netted by the job loss/gain.

4     Stilwell, Victoria (October 9, 2012) “Jack Welch Leaves Reuters After Twitter-Post backlash”. Bloomberg Businessweek. Retrieved on October 20, 2012 from:
5     Brown, Abram (September 20, 2012) “Bank of America Cutting 16K Jobs By Dec.: Big Bank Would End Slim-Down A Year Early”. Forbes. Retrieved on October 15, 2012 from:
6     Ghosh, Palash (July 29, 2011) “Pharmceutical Giant Merck to Cut Nearly 12,000 Jobs”. International Business Times. Retrieved on October 20, 2012 from:
7     Preece, Rob (May 24, 2012) “Computer giant Hewlett-Packard to slash 27,000 jobs by October 2014”. Mail Online. Retrieved on October 20, 2012 from:
8     Reuters (October 18, 2012) “AMD Announces 15% Cut in Workforce”. Reuters. Retrieved on October 20, 2012 from:
9     Haq, Husna (October 17, 2012) “Amazon will hire 50,000 temporary workers for the holidays”. Christian Science Monitor. Retrieved on October 21, 2012 from:
10    BLS (October 5, 2012) “The Employment Situation – September 2012”. Bureau of Labor Statistics. Retrieved on October 18, 2012 from:
11    Morgan, Timothy Prickett (September 17, 2012) “IT biz bosses are ‘BIGGEST job cutters’ in the US”. The Register. Retrieved on October 20, 2012 from: |        weakness begets more weakness       |   october 2012                                                                                            4
The trend of high-salary job losses offset by low-salary job gains is increasingly evident among the youngest participants
of the 99% – recent college graduates. Figures analyzed by Northeastern University’s Center for Labour Market studies
stated that, in 2011, approximately 53.6% of bachelor’s degree-holders under the age of 25 were either jobless or working
in positions that didn’t require a college education, representing the highest percentage in at least 11 years.12 The data
cited in the study implies that at least one out of four recent college graduates was completely out of work last year.
This trend is unlikely to change anytime soon. According to government projections, “only three of the 30 occupations
with the largest projected number of job openings by 2020 will require a bachelor’s degree or higher to fill the position
– teachers, college professors and accountants. Most job openings are in professions such as retail sales, fast food and
truck driving, jobs which aren’t easily replaced by computers. 13 With two thirds of the national college class of 2011
burdened with an average student loan debt of $26,600, the US economy will not be able to count on this demographic
to generate increased spending in the years to come.14 If anything, most of these recent college grads are essentially
an economic write-off until the US labour market improves.
This trend of lower pay is also starting to show in post-graduate professions. According to statistics from the National
Association for Law Placement (NALP), of law graduates in 2011 whose employment status was known, only 65.4%
obtained a job for which bar passage was required.15 NALP writes, “Moreover, with about 8% of these jobs reported as
part-time, the percentage employed in a full-time job requiring bar passage is even lower, 60%. 16 Figure 4 shows the
decrease in average law salaries since 2009, with the most striking decline evident in the median salary at law firms,
which has fallen 35% over the past three years as law firms shift to more lower paying jobs

                                                           2009                               2010                               2011                     Decrease 2009-2011
 Median Salary (New Graduates)                           $72,000                            $63,000                            $60,000                              17%
 Mean Salary (New Graduates)                             $93,454                            $84,111                            $78,653                              15%
 Median Firm Salary                                     $130,000                           $104,000                            $85,000                              35%
 Mean Firm Salary                                       $115,254                           $106,444                            $97,821                              15%
Source: National Association for Law Placement, Inc.

Think of the difference in disposable income between a salary of $130,000 in 2009 vs. $85,000 in 2011. That’s the
difference that isn’t being expressed in today’s labour statistics, but has a profound impact on consumer spending.
Then there are the retirees, and while they may not yet identify themselves with the Occupy movement, they do
undeniably make up a key component of the 99%. This is a group that has not only faced continual inflation erosion,
particularly due to massive increases in healthcare costs (see Figure 5), but also now faces the burden of generating
retirement income in a perpetual zero percent interest rate environment. If there is any group that has felt the decline
in living standards over the past decade it is this one. Consider, for example, that in 2012 a savings of $1 million dollars
invested in a generic 10-year Treasury bond currently pays a mere $17    ,000 in interest before taxes. And that’s $17,000
in 2012 dollars. In comparison, $1 million invested in 10-Year Treasuries in 1999 would have generated $47    ,200 before
tax in 1999 dollars, when a gallon of gas was $1.22 and the cost of almost every household item was lower by half.
There is no statistic that measures the impact of this decline on the disposable income for retirees, but it doesn’t
take much imagination to realize that it has completely changed the prospects for an entire generation of savers.

12    Weissmann, Jordan (April 23, 2012) “53% of Recent College Grads Are Jobless or Underemployed – How?”. The Atlantic. Retrieved on October 19, 2012 from:
13    Associated Press (April 23, 2012) “Half of recent college grads underemployed or jobless, analysis says”. Associated Press. Retrieved on October 19, 2012 from:
14    Pope, Justin (October 18, 2012) “Average debt up again for new college grads”. Bloomberg Businessweek. Retrieved on October 20, 2012 from:
15    NALP (July 12, 2012) “Median Private Practice Starting Salaries for the Class of 2011 Plunge as Private Practice Jobs Continue to Erode”. National Association for Law Placement,
      Inc. Retrieved on October 19, 2012 from:
16    Ibid. |         weakness begets more weakness         |   october 2012                                                                                                5

            1999                 2001                    2003                     2005                     2007                    2009                    2011

Source: US Department of Labor: Bureau of Labor Statistics

Then there are the millions of Americans who haven’t saved enough: According to the Transamerica Center for Retirement
Studies, an estimated 54% of workers in their 60’s do not have enough financial wealth to sustain themselves in their
retirement.17 According to the Employee Benefit Research Institute, 60% of all workers in the US have less than $25,000 of
savings and investments.18 That’s less than $25,000 in an investment environment that only pays 1.7% on 10-year Treasury
bonds. If they don’t have enough saved for retirement today, how can we expect them to spend more tomorrow? Couple
this with the 46 million Americans who are now enrolled in the federal welfare food stamps program, (more than double
the amount from a decade earlier), and it paints an extremely bleak picture.19 But this is the reality of the 99%. This is the
reality affecting the class of consumers that is expected to drive the US out of recession.
When Ben Bernanke announced QE3 in September, he discussed the importance of increasing the US consumer’s
willingness to spend: “The issue here is whether or not improving asset prices generally will make people more willing
to spend… If people feel that their financial situation is better because their 401(k) looks better for whatever reason,
or their house is worth more, they are more willing to go out and provide the demand. The 99% will not spend more
unless the trend in declining real incomes can be reversed. The current antidote of quantitative easing has indeed helped
the equity market and lowered the costs of mortgages. But on the flipside, it has driven the prices of food and energy far
beyond the rate of inflation, destroyed retirees’ savings through zero percent interest rates, and ultimately done nothing
to boost the confidence and investment required to reverse the persistent labour trend towards lower paying jobs.
The sad fact is that the economic reality for the average family is far worse today than it was ten years ago… even fifteen
years ago, and the trend of declining wealth is firmly in place. The youth need higher paying jobs and the retirees need
yield, and for all the trillions of dollars that the US government and other western governments have spent and printed,
none of it has addressed these key areas of weakness in a way that can reverse the long-term trend. As we approach
year-end and the finality of the US election, there will likely be numerous indicators implying a US recovery. Unless they
directly benefit the 99%, we would advise readers to take them with a large, bipartisan grain of salt. Weakness begets
weakness, until something dramatic reverses the trend’s course. The 99% are firmly stuck in a declining trend, and we
do not see it reversing any time soon.
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17    Bayston, Darwin (October 8, 2012) “Baby Boomers Will Drive the Life Settlement Industry Over the Next 15 Years!”. Life Insurance Settlement Association.
      Retrieved on October 20, 2012 from:
18    Ibid.
19    RT (October 17, 2012) “One million more Americans sign up for food stamps in only a year”. RT. Retrieved on October 20, 2012 from: |         weakness begets more weakness        |   october 2012                                                                               6
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