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September 15, 2017

Why Consumer Spending Has Been Dragging Despite “Record Median Household Income”

By Wolf Richter, Wolf Street  

One more thing about the new Census Bureau’s Income and Poverty report for 2016, which found to the great excitement in the media that median household income, adjusted for inflation (via CPI), rose 3.2% in 2016 to $59,039 – finally a tad above where it had been 17 years ago.

We already found buried in it that inflation-adjusted earnings from wages, salaries, etc. for full-time employed men have fallen 4.4% since 1973.

So now, we’ll look at another data set buried in the Census Bureau’s report, which is based on respondents at 98,000 addresses across the US. We want to know which households were the lucky ones – and turns out, there weren’t very many.

“Earnings” in this report are the fruits of labor – so wages, salaries, and the like. “Household income” includes not only “earnings” but also money from other sources during the year. These are the sources of “household income” in the report:

  1. Earnings
  2. Unemployment compensation
  3. Workers’ compensation
  4. Social security
  5. Supplemental security income
  6. Public assistance
  7. Veterans’ payments
  8. Survivor benefits
  9. Disability benefits
  10. Pension or retirement income
  11. Interest
  12. Dividends
  13. Rents, royalties, and estates and trusts
  14. Educational assistance
  15. Alimony
  16. Child support
  17. Financial assistance from outside of the household
  18. Other income

This is critical when looking at the income distribution as to which households had the most income because proceeds from investment (#10, 11, 12, and 13 in the list above) play a big role in households with large investments.

This chart shows the top 5% of households (red line), whose inflation-adjusted household income has soared by nearly $200,000 (112%) since 1967. Compare this to the bottom 60% of households (three lines at the bottom), whose incomes have booked tiny gains, with the bottom 20% gaining just $2,900 in household income over the past 50 years:

Some observations:

For the bottom 40% on the income scale of the households (the bottom two lines in the chart): Household income adjusted for inflation for the lowest quintile has dropped 9.5% since 1999; and for the second lowest quintile, household income has dropped 2.4% since 2000.

Households in the third lowest quintile (40% to 60% on the income scale, purple line) have now finally squeaked past their prior income peak in 2000, but by less than 0.5%.

Households in the fourth quintile (60% to 80% on the income scale, green line) have done reasonably well, gaining $33,000 in annual household income (53%) over the past 50 years, and $4,000 since their prior income peak in 2000.

The top 20% of households (dark blue line) have gained $101,000 in annual household income (91%) since 1967 and are up $15,000 from their prior peak in 2000.

This group includes the top 5%, where the music plays. Their prior income peak was in 2001 at $353,000. In 2016, they booked $375,000. These households now make nearly $200K more on an inflation adjusted basis than they did in 1967, a 112% jump.

Also note how household income in this top 5% category fell sharply during the Financial Crisis, and how the Fed’s monetary policies, designed to create what Bernanke called the “Wealth Effect,” effectively created wealth and income for them, benefiting the most those households with the most assets. Hence, incomes from their investments began to surge in 2010. For them, the Fed, personified by Bernanke, was the guardian angel — while the middle class was getting further hollowed out, with the bottom 60% getting shafted.

Thankfully, the Census Bureau did not provide data on the top 1% or the top 0.1%. It would have made that chart look absurd.

And on second thought, for an economy based on consumer spending, strangling the incomes of 80% of those very consumers on whom the economy relies for growth, while bailing out and enriching a tiny group at the top, doesn’t quite appear to be an effective economic model over the longer term.

Courtesy of Wolf Richter, Wolf Street

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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