Dow is flying high; why most of us aren’t
Wages have only recently started to recover after months of declines that stretched family budgets thin. Unemployment is stuck near 8 percent. Signs of a housing recovery have boosted stocks, yet millions of people face foreclosure.
The Associated Press
WASHINGTON — The Dow roared to a record Tuesday, closing at 14,253.77 to top the previous record, set in 2007. But although it has now regained all the losses suffered in the Great Recession, the market’s run-up feels worlds away from the lives of many Americans.
Wages have only recently started to recover after months of declines that stretched family budgets thin. Unemployment is stuck near 8 percent, high enough that most Americans still know people who are out of work. Signs of a housing recovery have boosted stocks, yet millions of people face foreclosure.
Here are five reasons why many Americans don’t share Wall Street’s cork-popping mood:
Investors fled markets
Fewer people have money invested in the stock market, so many missed out on the rally.
Americans sold more stocks than they bought for a fifth straight year in 2012, despite unprecedented efforts by the Federal Reserve to juice the market and encourage investment. Americans have sold hundreds of billions of dollars’ worth of stock — the first time on record that’s happened during a sustained bull market. The market rise has been powered by big investors such as pension funds.
The flight from stock markets has coincided with a series of confidence-rattling stumbles: last year’s botched initial public offerings by Facebook and BATS Global Markets; the 2010 flash crash that sent the Dow plunging 600 points in five minutes; unprecedented volatility related to European and U.S. fiscal policy debates.
Confidence in the market was already weak after the harrowing financial crisis that peaked in 2008.
Americans who didn’t buy stocks early simply haven’t benefited from the rise that pushed the Dow up 118 percent since its recession low in March 2009.
There have been recent signs that investors are shifting their cash back into stocks, banking on markets continuing to rise.
Wages are stagnant and incomes are shrinking.
The weak job market is limiting pay. With so many applicants to choose from, employers need not compete for workers by boosting salaries.
Hourly wages increased 2.1 percent last year, barely enough to keep up with inflation. Median household incomes fell 4.8 percent between June 2009 and June 2012, after adjusting for inflation, according to a report by Sentier Research, which crunches census and other government data.
Meanwhile, Americans are paying down debt. That leaves fewer dollars available for spending.
Paychecks took a hit
The Social Security tax break is no more.
Nearly 80 percent of working Americans are taking home less pay this year because of a tax increase that took effect Jan. 1.
The last-minute tax deal between Congress and President Obama to extend some lower tax rates did not renew a reduction in Social Security payroll taxes.
As a result, the rate increased this year to 6.2 percent from 4.2 percent.
The extra 2 percent will cost someone making $50,000 about $1,000 a year, and a household with two high-paid workers up to $4,500.
Housing woes drag on
Housing may have hit bottom, but it hasn’t fully recovered.
In a healthy housing market, builders start work on about 1.5 million homes a year. Last year, they began 780,000. That’s a 41 percent increase from 2009, but not enough to revive big industries like construction that rely on the production of new homes.
Home-price gains also suggest a slow, uneven healing process.
The S&P/Case-Shiller index of home prices started rising in June after 20 straight months of decline. Prices nationwide remain about 30 percent below the peak reached in mid-2006.
For many Americans, their home is their most valuable asset. When it loses value, they feel less wealthy and are less likely to spend and contribute to the recovery.
The problem is more acute for the millions who owe more on their mortgages than their homes are worth.
Millions more faced foreclosure because they couldn’t afford the payments on loans they took out during the credit bubble.
Foreclosures cause negative ripples throughout the economy. Foreclosed properties make neighborhoods less attractive to buyers and delay the recovery of home prices. People who experience foreclosure generally can’t qualify for loans, limiting their ability to spend as the economy picks up.
Despite recent gains, hiring remains slow.
The unemployment rate stands at 7.9 percent, an improvement from the double-digit levels seen at the height of the recession, but still well above the 5 percent level that was considered normal before the recession.
Unemployment affects the broader economy and consumers’ outlooks in a number of ways. Jobless people contribute less to consumer spending, which accounts for about 70 percent of economic activity.
Acrimony over extending long-term benefits for unemployed people has contributed to the rolling series of budget standoffs in Washington, D.C., that are rattling the economy.
And for every unemployed American, there are many more who feel less secure financially because their own job situations are tenuous.