So says a majority of more than three dozen economists surveyed last week by The Associated Press. Their concerns tap into a debate that has intensified as middle-class pay has stagnated while wealthier households thrive.
A key source of the economists’ concern: Higher pay and outsize stock market gains are flowing mainly to affluent Americans. Yet these households spend less of their money than do low- and middle-income consumers who make up most of the population but whose pay is barely rising.
“What you want is a broader spending base,” says Scott Brown, the chief economist at Raymond James, a financial advisory firm. “You want more people spending money.”
Spending by wealthier Americans, given the weight of their dollars, does help drive the economy. But analysts say the economy would be better able to sustain its growth if the riches were more evenly dispersed. For one thing, a plunge in stock prices typically leads wealthier Americans to cut sharply back on their spending.
“The broader the improvement, the more likely it will be sustained,” said Michael Niemira, the chief economist at the International Council of Shopping Centers.
A wide gap in pay limits the ability of poorer and middle-income Americans to improve their living standards, the economists say. About 80 percent of stock market wealth is held by the richest 10 percent of Americans. That means the stock market’s outsize gains this year have mostly benefited the already affluent.
In a speech this month, President Obama called income inequality “the defining challenge of our time.”
He also called for an increase in the federal minimum wage, now $7.25. Republican leaders in the House oppose an increase, arguing that it would slow hiring.
Several states are acting on their own. California, Connecticut and Rhode Island raised their minimum wages this year. Last month, voters in New Jersey approved an increase in the minimum to $8.25 an hour.
Income inequality has steadily worsened in recent decades, according to government data and academic studies. The most recent census figures show that the average income for the wealthiest 5 percent of U.S. households, adjusted for inflation, has surged 17 percent in the past 20 years. By contrast, average income for the middle 20 percent of households has risen less than 5 percent.
Economists appear to be increasingly concerned about the effect of inequality on growth. Brown says that marks a shift from a few years ago,
when analysts were divided over whether pay inequality was worsening.
Now, he says, “there’s not much denial of that … and you’re starting to see some research saying, yes, it does slow the economy.”
The economists are also confident that U.S. growth is picking up. Three-quarters said the recovery, which officially began 4Â½ years ago, has yet to reach its peak. And nearly all think the next recession is at least three years away; half think it’s at least five years away.
The economists forecast that growth will average 2.9 percent in 2014. That would be the healthiest annual pace since 2005.
One reason they expect healthier growth is that the effects of tax increases and government spending cuts that kicked in early this year should fade.
A budget bill that passed a pivotal test in the Senate on Tuesday will reverse some of those spending cuts. That should add slightly to economic growth. The bill also removes the threat of another government shutdown next year.
Among the economists’ other views:
• The Obama administration’s health care law will make little or no difference to the job market. About two-fifths said the law would cost jobs. None said it would increase hiring. The law has drawn fierce opposition from many small business owners, who say it will raise hiring costs by requiring companies with 50 or more employees to provide coverage starting in 2015.
• The stock market isn’t in a bubble. While the Dow Jones industrial average reached record highs earlier this year, most economists said that higher profits largely justified the gains.
• Europe will keep growing and avoid a recession in 2014. But growth will remain so tepid that inflation will be nearly non-existent. Nearly two-thirds of the economists forecast that inflation won’t consistently reach the European Central Bank’s inflation target of 2 percent until 2016.
• Inflation in the United States will remain low for the long run. A majority of economists think consumer inflation won’t consistently meet or exceed the Fed’s 2 percent target level until 2015 or later.