In The Headlines

Are Declining Middle Class Fortunes a Global Problem?”

From Brexit to Donald Trump, it seems that current events are telling us the man on the street is angry and wants change. A new report from the McKinsey Global Institute, with the chilling title Poorer than their Parents: Flat or Falling Incomes in Advanced Economies, shows just why this is the case. According to the paper, the trend in stagnating or declining incomes for middle-class workers is not just confined to the United States but is a global phenomenon hurting workers across the wealthy world.

The report found that as much as 70% of the households in 25 advanced economies saw their earnings drop in the past decade. The study tracked income brackets, not individual households, from 2005 to 2014. That compares to just 2% of households that saw declining incomes in the previous 12 years. The authors estimate that this means that “while fewer than ten million people were affected by flat or falling incomes in the 1993-2005 period, that figure exploded to between 540 million and 580 million people in 2005-2014.” To put it bluntly: A huge swath of the world’s population, one taught to expect their material wealth to grow through their lifetimes and across generations, has learned that this promising future is not, after all, their future. It is hardly surprising that some voters in first world economies are being seduced by radical politics and specious solutions to their economic problems.

There are a few caveats. First, McKinsey researchers did not conduct a longitudinal study that tracks the individual fortunes of specific people over the course of many years. So while we know that the incomes of population segments (for instance a male 40-year-old college grad) are stagnant or falling, individuals within those segments may have much different fortunes. A 2015 study of the American middle class by sociologists Thomas Hirschl of Cornell University and Mark Rank of Washington University show what a difference this can make. They found that because of large variances in income over a lifetime, individual earners spend part of their lives as top earners and at other times, are on the bottom heap. Therefore, what can seem like a slow and steady decline of economic fortunes for the middle class might not feel that way for many members of that class.

In addition, government redistribution is doing a lot to blunt the effects of this trend on those who are suffering from it. When household income after taxes and transfers of income (like social security payments) are taken into account, only about 20 to 25% of households in the countries studied saw their incomes stagnant or falling. And there was much variance between countries in terms of how many people were impacted by the trend. According to the report:

Italy is at one extreme, having experienced a severe economic contraction in the recession after the 2008 financial crisis and has had a very weak recovery since. There, real market incomes were flat or falling for virtually the entire population. At the other extreme is Sweden, where only 20% of the population had flat or falling market incomes. In each of the four other focus countries—France, the Netherlands, the United Kingdom, and the United States—the proportion of segments whose market incomes did not advance was in the 60 to 80% range.

The authors write that the reason for this variation “reflect differences in policy approaches; labor institutions such as the strength of unions and their role, or services for the unemployed; and a widely varying national economic, fiscal, and monetary policy responses.” For instance, one Swedish trait the authors point to—which they say helped protect workers in the aftermath of the recession—is a strong labor movement. They argue that the fact that 68% of Swedish workers belong to a union helped to keep wages rising. Furthermore, a labor sharing scheme, whereby the Swedish government worked with companies and unions to prevent layoffs by reducing hours worked rather than unemployment helped protect that country from the scourge of long-term unemployment that has depressed workers earning potential in the United States. But whatever the policy prescription for solving the problem of wage stagnation, this report makes clear that this is a new and growing problem in the world’s wealthiest economies.

Citations

1. http://for.tn/29FUJqz – Fortune
2. http://bit.ly/29xvEPA – McKinsey & Co.

Warby Parker vs. Shinola: A Battle for the Souls of Millennials?

Warby Parker and Shinola are not rivals: yet. Warby Parker predominantly sells eyewear, while Shinola deals in watches and leather goods. But the countdown clock on their future rivalry started in January when Shinola founder Tom Kartsotis told The New York Times that he plans to introduce eyewear in 2017, and he added that he expected it to rapidly become his largest revenue driver.

Shinola signaled that it would soon be in a pitched battle with Warby Parker to be the specialty-retail tastemaker to millennials. Shinola retail stores have surfaced in more than a dozen cities and it plans to almost triple that by late 2017. Last year, it made $100 million in sales. Each company has acquired dedicated fan bases who want accessories that provide a little meaning and leave them with a warm, ‘do-gooder’ feeling. At the same time, both firms are expanding into new categories and new cities, pushing the boundaries of their brands. So whose vision of an authenticity-focused, aspirational lifestyle is most attractive to people who believe that the soul of a company is as meaningful as its products? The answer may lie as much in the style they project, as their business models.

The Warby Parker experience inside its corporate headquarters illuminates what makes the brand special. On the sixth floor of its offices on the cusp of SoHo and Tribeca, you enter through a store, where none of the employees look older than 30, and the white marble tables, light-wood shelves, and midcentury-modern accents glow in natural light from the nearly floor-to-ceiling windows. Rows of low bookshelves showcase cult favorites. A few shelves away there’s a Warby Parker–published book, Daydreamer’s Rx, with cartoons of “prefabricated fantasies” designed to spark imagination. And underlying it all is the fact that, by buying its products, Warby customers have provided glasses to more than a million people in need.

A little less than a mile away, Shinola’s flagship store in Tribeca sits on a quiet cobblestone street. Inside the door, you pass through a thick velvet curtain into a café called the Smile Newsstand, a micro version of the downtown hipster restaurant-retail concept. It serves coffee to an upscale clientele. To get to the watches, bikes, and leather goods, you pass a wall lined with portraits of people who assemble these products. A sign next to them reads: A TRUE MANUFACTURING COMPANY IS BUILT NOT BY THE THINGS IT MAKES. IT’S BUILT BY THE PEOPLE WHO MAKE THEM.

Shinola has staked its brand on the idea that making something in America, and especially in American cities that need jobs most, will inspire well-off buyers to open their wallets. The $2,950 bicycles and $75 pens (and baseball mitts and, soon, audio equipment) are merely a way for them to help the underdog—the American working class—get back in the business of high-quality craftsmanship. Shinola has so connected itself to being part of an American manufacturing comeback story, particularly in Detroit, that President Obama recently gave U.K. Prime Minister David Cameron a custom-made Shinola watch. The company’s move to assemble eyewear on Chicago’s South Side, a neighborhood that could use a few jobs and some good news, goes right to the heart of the one weakness in Warby Parker’s buy-one, give-one strategy: Its eyewear is made overseas, and most of the people in need who receive its donated glasses are also international.

It is a powerful message, but there is one rub: Crain’s Detroit Business reported that, prior to founding Shinola, Kartsotis—who previously built Fossil into a billion-dollar accessories brand—commissioned a study that concluded that people would rather spend $15 on a pen made in Detroit than $5 on one made in China. And if you can push the price points even more, all the better. As well-meaning as Shinola might be, its products have been criticized for gaudiness and high prices that can come across as arrogant.

In contrast, Warby Parker offers reasonable prices and a more approachable, minimalist style. Its stores aspire to being fun places to hang out, featuring free photo booths and throwing parties—complete with popcorn and cotton candy—to celebrate the start of spring. Warby Parker’s extension into book publishing is good marketing. Pairing literature with eyeglasses makes sense. But it also doubles down on its fans, and it gives Warby Parker an enviable claim to the future of fashion and business. So far the strategy has worked. Today, Warby Parker is estimated to be valued at over $1 billion. Advantage Warby?

Citations

1. http://bit.ly/28Pj91A – Fast Company
2. http://bit.ly/29XmHBQ – Forbes
3. http://on.inc.com/1UEYCkV – Inc.

The Good News Is . . .

• U.S. industrial production rose more than expected in June on large gains in automotive manufacturing and utility output, prompting the Federal Reserve to call it a sign that the economy was regaining momentum at the end of the second quarter. Industrial output increased 0.6% last month, the strongest gain since July 2015. Output of automotive products jumped 5.9%, while machinery output was up 1.1%, according to the Fed. Output of computers, electronics, and appliances increased 1.5%.

• Delta Airlines, Inc., a leading international air carrier, reported earnings of $1.47 per share, an increase of 15.7% over year-earlier earnings of $1.27 per share. The firm’s earnings topped the consensus estimate of analysts by $0.06. The company reported revenues of $10.4 billion, which Delta management attributed to the company’s successful efforts to lower fuel costs, decrease non-operating expenses, and maintain a strong positive cash flow.

• The owners of Hostess Brands announced that they had agreed to sell a majority stake in the company to a publicly traded affiliate, Gores Holdings, of the Gores Group, an investment firm, for about $725 million. The transaction will be the second in which Hostess—a company born in 1919 with the Hostess CupCake and made famous with the seemingly indestructible Twinkie—has traded hands since emerging from bankruptcy protection three years ago. It also raises the stakes for Hostess, joining the public markets at a time when more consumers are shunning sweets in favor of more nutritious treats.

Citations

1. http://on.wsj.com/29VfMbq – Wall Street Journal
2. http://cnb.cx/1gct3xa – CNBC
3. http://bit.ly/29QCKld – Delta Airlines, Inc.
4. http://nyti.ms/2aggH4U – NY Times Dealbook

Planning Tips

Guide to Saving on Homeowner’s Insurance

Homeowners insurance is one of those things most of us rarely think about. It is easy to put a policy in place and then forget about it—until it is too late. The coverage needs to address the value of the building—which changes with upgrades—and the value of our belongings, especially high-value items like jewelry, antiques, and other collectibles. It is worth taking the time to review your homeowners insurance—what it covers and how much you are paying for it. Doing so can save you a substantial amount of money. Below are some tips for helping you get the most value from your homeowner’s insurance. Be sure to consult with your financial advisor to determine the most appropriate homeowner’s insurance for your situation.

Compare prices – It is relatively easy to save money on insurance. The internet makes shopping simple. But do not stop there. Once you have the basics down, look at the various policies you can buy. But, like anything else, you should not jump at the lowest rate. Go to the National Association of Insurance Commissioners to review insurers in your state and check complaints. The site notes that states often make information available on typical rates charged by major insurers, and many states provide the frequency of consumer complaints by company.

Raise your deductible – The larger the loss you are willing to absorb before the insurance takes effect—in the event of damage—the less your insurance will cost month-to-month. Raising your deductible from $250 to $1,000 could slash your premium by 10 to 30%. That is a lot of savings, without a lot of extra risk.
Look into discounts on multiple policies – If you do live in an area that is prone to earthquakes, floods or other disasters, do not forget to ask for “multiline” discounts. According to the Insurance Information Institute, some companies will reduce the price of your policy by 5 to 15% if you purchase two or more policies with them. Just make sure that the end result is less expensive than the combined cost of policies from different companies.

Evaluate your current replacement cost – You want sufficient insurance to cover the cost of replacing your home from scratch. But you won’t need to replace the land, so do not factor that into your insurance. Verify the amount your insurance company says is the replacement cost of your home by multiplying the cost per square foot for a residential building in your area by the number of square feet you have. Be sure that your insurance is sufficient to cover the replacement cost of everything in your house, including valuables that become worth more over time. On the other hand, if you no longer own valuable diamond jewelry or an extensive collection of art, you no longer want to be paying for the extra coverage. This annual review is a good time to make sure your inventory of your possessions, including photos or a video, is up to date and saved somewhere outside your home.

Install a protection system – A number of insurers offer discounts of at least 5% if your home is equipped with a smoke detector, burglar alarm or dead-bolt locks. This amount may increase to 15% or more if your alarm has active monitoring with dispatch capabilities and your home contains a modern sprinkler system, according to the Insurance Information Institute.

Citations

1. http://bit.ly/1NIeRZ2 – Insurance Information Institute
2. http://bit.ly/12ka1NH – Bankrate
3. http://bit.ly/29PL70N – MoneyTalkNews.com
4. http://bit.ly/29XJv4D – 360financialliteracy.com
5. http://bit.ly/1S4mQBa – QuickandDirtyTips.com