The Federal Reserve released its triennial Survey of Consumer Finances (SCF) for 2016 last week. According to the Fed, the SCF “collects information about family incomes, net worth, balance sheet components, credit use, and other financial outcomes”, and this large and comprehensive survey serves as a valuable resource for economists seeking to understand the financial condition of US families. Unfortunately, the survey is published only once every three years, which means the last snapshot we got was for 2013. The inaugural SCF was published in 1989, so the total of ten SCF’s published to date cover a 27-year time period including three recessions.
Though much of the data within the 2016 SCF was encouraging, the overall take-away for us was that the problem of economic inequality continues to worsen. But let’s start with the good news. Median family income (pre-tax and adjusted for inflation) rose 10% from 2013 to 2016 to $52,700, and comparisons were positive across all income levels. (Median simply means that 50% of families are above the median and 50% are below.) The increase in incomes since the last SCF is directionally consistent with data recently published by the US Census Bureau, which said that median household income rose 7% from 2013 to 2016 to a new all-time high of $59,039. The differences between the Fed survey of families and the Census Bureau survey of households is beyond the scope of this Market Commentary. We simply wanted to show that the two surveys are telling the same story. Both surveys say that incomes have been on the rise over the past three years, even after adjusting for inflation. However, it is important to also point out that prior to the gains over the past three years, both surveys also show that median incomes were basically flat over the 24 years from 1989 to 2013.
Source: Federal Reserve and US Census Bureau.
In addition to family incomes, the Fed’s SCF tracks family net worth. Results on this score were also encouraging for the past three years. Median family net worth rose 16% to $97,300 in 2016 from an inflation-adjusted $83,700 in 2013. Once again, the comparisons were positive across all levels of net worth. Moreover, the increase from 2013 to 2016 is consistent with the Fed’s separate quarterly survey of aggregate household net worth, which rose by about $14 trillion to $97 trillion from the end of 2013 to the end of 2016. The translation? Continued gains in stocks and housing are making people richer!
Happy days are here again, right?
The trouble starts when we analyze the data a little more closely. The chart below compares the trends in median and average (alternatively, “mean”) family incomes over the past 27 years since the SCF began. As we discussed above, median family income was essentially flat over the 24 years ending in 2013. This means that nearly half of all families suffered a decline in inflation-adjusted income from 1989 to 2013. That’s a fairly staggering statistic. The average family, on the other hand, enjoyed a 19% increase in inflation-adjusted income over that same 24 years. And the disparity between median and average increased from 2013 to 2016, a time frame during which average family income grew 14% compared to just 10% for the median. The interpretation of all this? The highest earners have enjoyed large increases in income while the large majority of families have stagnated.
Source: Federal Reserve.
The variance between median and average was even more pronounced when looking at family net worth. From 1989 through 2013, median family net worth actually fell 4% after adjusting for inflation while average family net worth rose 59%. And if we include the solid gains reported in each metric for 2013 to 2016, median family net worth still only increased 11% since 1989 compared to the 100% gain in average net worth.
Source: Federal Reserve
We have one final chart to illustrate the increased concentration of income/wealth over the past three decades. According the Fed’s data, the wealthiest 1% of American families claimed 30% of the total wealth in 1989 while the bottom 90% claimed 33%. If we look at the data for 2016, the percentage of wealth claimed by the top 1% has increased to 39% – well above the 23% claimed by the bottom 90%. These figures, in a nutshell, can explain much of the rise in middle class frustration over the past several years.
Source: Federal Reserve
The recently released Fed data was encouraging in that middle-class incomes appear to be growing again. However, the wealthiest among us are enjoying far superior growth rates in income and wealth, pushing economic inequality up to levels not seen since the eve of the Great Depression. This expanding inequality is the direct result of Federal Reserve monetary policy, and it deserves more attention from the Fed. In our view, sustainably higher rates of economic growth are only possible when the benefits of growth become more evenly distributed. The Fed should take heed.
As always, please remember we are not making a social judgement or political comment. We simply believe, and most economists would probably agree, that more widely distributed income and wealth is the best way to achieve higher and more sustainable rates of economic growth. It only makes sense that more money in the hands of those more inclined to spend it will go a long way in boosting growth.