Why the Middle-Class Squeeze Is Getting Worse

Heather Berger of the U.S. Economics Team hosts Wealth Management Senior Economist and Strategist Sarah Wolfe to discuss what it takes to define the middle class in America today. They break down how factors like rising essential costs and the development of AI are reshaping consumer balance sheets and financial security.Sarah Wolfe is a member of Morgan Stanley's Wealth Management Division and is not a member of Morgan Stanley’s Research Department. Unless otherwise indicated, her views are her own and may differ from the views of the Morgan Stanley Research Department and from the views of others within Morgan Stanley.Read more insights from Morgan Stanley.----- Transcript -----Heather Berger: Welcome to Thoughts on the Market. I'm Heather Berger from Morgan Stanley's U.S. Economics Team.Sarah Wolfe: And I'm Sarah Wolfe, Senior Economist and Strategist on Morgan Stanley's Thematic and Macro Investing team in the Global Investment Office.Heather Berger: Today, the K-shaped economy, the middle class, and how AI could reshape both.It's Friday, September 11th, at 10a.m. in New York.The K-shaped economy has been a major theme this year. At its core, it describes an economy where households are experiencing very different circumstances. Those with more assets have benefited from rising wealth, while those with less wealth remain more dependent on income and more exposed to increases in essential costs. But that top versus bottom framing can miss an important part of the story: the middle class. Sarah, you recently wrote about what it takes to make it to the middle class in America. How would you define the middle class today, and how does that differ from the way that households define it themselves?Sarah Wolfe: I think the important thing here is that economists and households define the middle class very differently from each other, and, and I'll get into why that's the case.So if you're an economist, the middle class is roughly defined as two-thirds to twice the median household income, which today means if you're making around fifty-five thousand dollars a year to a hundred and sixty-eight thousand dollars a year, depending on where you live in the country, that is roughly the middle class. And that's where about half of Americans sit today.We've actually seen that number decline, so sixty-one percent of Americans in the 1970s were in that middle class definition by economist terms. Now it's about fifty percent, so we have seen it shrunk. But even though it's shrunk, fewer and fewer households feel like they're in the middle class, and they don't define it by necessarily income or a specific number, but they really define it by milestones, I would say.So do you own a home? Have you been able to build a family, and can you pay for childcare? Have you saved enough for retirement? Do you have an emergency fund? Are you constantly stressed about your bills? That feeling is really what the middle class is about today, and I would say that less than fifty percent of Americans actually feel like they're in the middle class once you start to put that definition around it.Heather Berger: What are the key factors that actually make a household feel financially secure?Sarah Wolfe: I think there's four things that determine household security and stability. The first, of course, is income, stable income. Do you have a job, and do you think you're going to continue to have a job six months from now? We love the University of Michigan Consumer Sentiment survey that asks consumers this.Do you have affordable fixed costs, like housing, childcare, healthcare, and transportation? Do you own assets? This is critically important because if we look at where gains have come from from the last five years, it hasn't really been that much through the labor income channel. It's been through the asset channel, like home equity, retirement savings, are you invested in the stock market, et cetera.And then the last one is this emergency fund and a manageab