They Should Have Seen It Coming

The empty cash registers finally got their attention. Businesses large and small are in a panic, wondering where their customers went. Last week the Census Bureau reported that November 2008 retail sales were 7.4 percent below November 2007 sales--a record decline. More than a few captains of industry are expressing surprise at the severity of the downturn. But anyone with an Internet connection, a calculator, and a modicum of curiosity could have seen this coming. Middle Americans are in trouble and so are the businesses that have long ignored them.

Easy money. Entitlement. Short-term thinking. All go a long way toward explaining why businesses are hurting. During the credit expansion of the bubble years, companies grew complacent and lost touch with Middle America. Even as conditions worsened for the average American, there was money to be made by selling bigger houses, bigger cars, and bigger televisions to the small fraction of the population that was living large. A handful of businesses did not abandon their roots, such as Wal-Mart and McDonalds. Their focus on Middle America never wavered. That explains why November sales were higher than expected at Wal-Mart (same-store sales up 3.4 percent) and McDonalds (up 4.5 percent) while almost everyone else reported sharp declines. Now businesses are playing catch-up. They must reacquaint themselves with Middle America, and fast.

American Business, meet Middle America:

• Where men's earnings have been declining for more than two decades. The median earnings of men who work year-round, full-time peaked in 1986.
  
• Where household incomes are shrinking. Median household income fell 1 percent between 2000 and 2007, after adjusting for inflation.
  
• Where, between 2000 and 2006, the average household had already cut its spending on restaurant meals, clothes, new cars, kitchen appliances, outdoor furniture, toys, newspapers and magazines, and a long list of other items.
  
• Where the average home was worth a modest median of $191,000 in 2007, according to the American Housing Survey--and it is worth even less today.
  
• Where, the percentage of people who moved fell to an all-time low of 13 percent in 2006-07 as the housing market seized up.
  
• Where the much vaunted American entrepreneurial spirit is all but dead. The percentage of workers who are self employed fell to an all-time low of 7.1 percent in 2007.
  
• Where the American dream of a college education is fading. The number of students enrolled full-time in four-year colleges fell 4 percent between 2005 and 2006 (the latest data available), according to the Census Bureau.
  
• Where the return on a college degree is shrinking. The median earnings of men and women with bachelor's degrees who work full-time peaked in 2002 and has fallen by 3 to 4 percent since then, after adjusting for inflation.
  
• Where the out-of-pocket cost of health insurance has climbed 27 percent since 2000, after adjusting for inflation.
  
• Where people are scrimping on health care. The number of physician visits fell 6 percent between 2005 and 2006 (the latest data available), according to the National Center for Health Statistics.
  
• Where 60 percent of workers do not have a 401(k) or an IRA, according to the Employee Benefit Research Institute.
  
• Where a growing proportion of older workers cannot afford to retire. The labor force participation rate of men aged 65 or older climbed 3 percentage points between 2000 and 2007.
  

Falling incomes. Rising costs. Spending cuts. Long before the 2008 economic meltdown, Middle America had assumed crash positions. If businesses had been paying attention to their customers rather than their cash registers, they could have positioned themselves for the crash as well. Now all they can do is pick up the pieces.