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Economy has helped some, made life harder on others

By Jon E. Hilsenrath and Sholnn Freeman
The Wall Street Journal

Joshua Berry and Ricky Williams, both Houstonians, have seen two very different economic recoveries.

Berry, an entrepreneur, has profited handsomely from the stock market, in the real-estate boom and by selling a business. Williams, an airline baggage handler, has been waiting since 2001 for a pay raise.

With the U.S. economy expanding and the labor market improving, it isn't clear how well the Democrats' message of a divided America will resonate with voters this fall. But many economists believe the economic recovery has indeed taken two tracks, exemplified by the experiences of these two Texas residents.

Upper-income families, who pay the most in taxes and reaped the largest gains from the tax cuts President Bush championed, drove a surge of consumer spending a year ago that helped to rev up the recovery. Wealthier households also have been big beneficiaries of the stronger stock market, higher corporate profits, bigger dividend payments and the boom in housing.

Lower- and middle-income households have benefited from some of these trends, but not nearly as much. For them, paychecks and day-to-day living expenses have a much bigger effect. Many have been squeezed, with wages under pressure and with gasoline and food prices higher. The resulting two-tier recovery is showing up in vivid detail.

Hotel revenue was up 11 percent in the first five months of 2004 at luxury and upscale chains, but up just 3 percent at economy chains, according to Smith Travel Research, a market-research firm. At the five-star Broadmoor Hotel in Colorado Springs, Colo., $600-a-night lakeside suites are sold out every day through mid-October.

Neiman Marcus Group Inc., flourishing on sales of pricey items like $500 Manolo Blahnik shoes, had a 13.5 percent year-over-year sales rise at stores open at least a year.

By contrast, such "same store" sales at Wal-Mart Stores Inc., retailer for the masses, were up just 2.2 percent in June. Wal-Mart believes higher gasoline costs are pinching its customers. At Payless ShoeSource Inc., which sells items like $10.99 pumps, June same-store sales were 1 percent below a year earlier.

"To date, the (recovery's) primary beneficiaries have been upper-income households," concludes Dean Maki, a J.P. Morgan Chase (and former Federal Reserve) economist who has studied the ways that changes in wealth affect spending. In research he sent to clients this month, Maki said, "Two of the main factors supporting spending over the past year, tax cuts and increases in (stock) wealth, have sharply benefited upper-income households relative to others."

The good times upper-income Americans are enjoying represent a bounce-back from the hit that many of the wealthiest took after bonus income dried up in 2001 and 2002 and stock options went sour.

Longer-term issues are also at work. Wage and income disparities between the rich and poor have generally been widening for nearly 20 years. In 1980, the top 10 percent of households in income accounted for 33 percent of total household income, according to economist Emmanuel Saez at University of California, Berkeley. By 2000, that had risen to 44 percent. The figures exclude capital gains.

Some economists believe the gap is driven wider by technological change and by the economy's increasing openness to global competition. Technology rewards skilled workers, and competition has generally punished the unskilled. Both factors have come into play in recent years as technology-driven productivity surged and the U.S. trade deficit widened.

For a sense of the divide, contrast the recovery experiences of Berry, a businessman who earns a six-figure income, and Williams, the baggage handler, who makes around $20 an hour for Southwest Airlines. Both have been shopping this month at the River Oaks Chrysler-Jeep car dealership in Houston.

Berry, 34 years old, is president of a nurse staffing business called ShiftBay.com. Last year, he and some partners sold a medical-supply business. Berry says that together they saved more than $100,000 in taxes.

Berry is also in the process of selling his house, which he says has appreciated by almost $100,000 over four years. And he says that while he lost a lot of money in the stock-market downturn that began four years ago, he has enjoyed hefty gains since the market turned up about 15 months ago. Berry is choosing between sticking with Chrysler (he now drives a Jeep Grand Cherokee) or trading up to a Cadillac, BMW or Mercedes-Benz.

Williams, 52, hasn't benefited from the boom in the price of houses, because he doesn't own one. His pay hasn't budged since 2001, although he is expecting a raise this month. Within a year, he expects his hourly pay to rise to about $24.

Williams' car lease (he, too, drives a Grand Cherokee) will be up in October, and he has been scrambling to come up with a down payment for a new Chrysler PT Cruiser. He was still $1,800 short last week. A Chrysler salesman was able to make up part of the difference with an additional $1,000 rebate targeted at returning lease customers, on top of $4,000 in manufacturer's incentives already on the table.

"With the economy the way it is, I've had to rob Peter to pay Paul, and then sometimes rob them both," Williams says.

The perception of a fast-lane/slow-lane recovery has become a central political issue. This year's stronger job market has led Democrats to shift their emphasis: away from the argument that Bush policies have failed to produce jobs and toward the idea that the expansion's fruits haven't been widely shared.

"They're telling people this is the best economy we've had," Sen. John Kerry mockingly told a riverbank crowd last Thursday evening in Charleston, W.Va., drawing jeers. "What does it mean when you don't have any health care at all?"

His running mate, Sen. John Edwards, speaks of "Two Americas," one "that does the work, another America that reaps the rewards."

Bush critics have argued that the economy is producing jobs mainly in low-paying industries like restaurants and temporary work. Bush counters that his opponents have been pessimistically distorting the economic statistics.

The Bush campaign cites data from the Bureau of Labor Statistics showing that, in the past year, there has been more net employment growth in occupations with above-average pay than in occupations with below-average pay.

Campaigning in Wisconsin last week, Bush spoke of a local family of six who benefited from elements of his tax package aimed at lower- and middle-income families, such as the child tax credit.

"Oh, some of the sophisticates will say that $2,700 doesn't matter to the Muellers: 'It doesn't sound like a lot to me,'" Bush said. "It is a lot to them. That's what counts."

Maki of J.P. Morgan Chase estimates that in terms of dollars saved, the top 20 percent of households by income got 77 percent of the benefit of the 2003 tax cuts, and roughly 50 percent of the 2001 tax cuts. And of stocks held by households, roughly 75 percent are owned by the top 20 percent of those households. That made them prime beneficiaries of last year's stock-market rally.

Many economists say the lopsided recovery is now at a critical juncture. The impetus from new tax cuts has largely passed, and the stock market has lost momentum, two factors that could slow the pace of higher-income people's spending in the months ahead. As a result, the time has come for the recovery either to broaden out to more-modest-income groups — or possibly lose momentum.

The late 1990s showed that lower-wage workers benefit when unemployment falls, as the tighter labor market helps underpin wages across income categories. With the job market improving, there is a chance this could happen again, but the outlook is still highly uncertain.

But some economists worry that the early stage of the recovery for low- to middle-income families is being squeezed by continuing pressure on wages and purchasing power. Average hourly earnings have risen at just a 1.9 percent annual rate since the job market started improving notably last August. Meanwhile, the consumer-price index — driven by higher food and gasoline prices — has risen at a 3.3 percent annual pace. The average worker's purchasing power, in other words, has declined even as more people have been finding jobs since August.

These aren't the only issues hanging over lower-income households.

Many are highly exposed to rising interest rates, says Mark Zandi, chief economist at Economy.com, because these households were more likely to take out adjustable-rate mortgages to squeeze into an ever-pricier housing market. For those who don't own homes, the chances of buying have become more remote as house prices have soared.

"Lower- and middle-income groups are going to remain under significant pressure," Zandi says.

Becky Salas, a 32-year-old vocational nurse in San Antonio, says her family is still pinching pennies, even though she believes an economic recovery is taking hold now. Expensive toys for her children, movies at theaters and meals at McDonald's also are out.

"Easily we could spend $20 at McDonald's for just one meal," Salas says. And "we can go fly a kite, instead of going to an expensive theater where the kids are going to yell and scream and won't enjoy it anyway."



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