Yesterday we received some positive news from the US Census Bureau. After adjusting for inflation, median household income rose 1.8% in 2017 to $61,372 – its highest level ever. We anticipate the release of this metric every year because we think it is one of the most important gauges of US consumer financial health. Why? Because so many of the other gauges of consumer health use averages (means) or aggregates rather than medians. Median is more insightful, in this case and others, because it represent the level at which half of households are earning more and half are earning less. Measuring incomes this way eliminates the influence of the wealthiest among us, and this is important because those at the very top of the income/wealth spectrum have been doing a highly disproportionate amount of the earning, spending, saving and wealth accumulation over the past couple of decades. As such, using medians is a much better way to get a sense of how way the typical US family is doing.
Now the bad news. While we are heartened to see median household incomes at record levels, the chart below shows that we are just now (actually in 2016) finally surpassing the previous high in 1999. This means that the typical US family has seen almost no growth in purchasing power over the past 19 years! And although it’s outside the scope of this Market Commentary, it should be acknowledged that prices for non-discretionary items, like health care, education, housing, child care, etc., have been growing at a much faster pace than prices for more discretionary purchases. This means that the typical US family has been squeezed quite severely over the past two decades.
Source: US Census Bureau
There are other things that bother us about the data. The chart below shows the components of the nominal growth rate in median household income since 1990. “Nominal growth” simply means that the growth rates have not been adjusted for inflation. Therefore, the nominal rate of growth (represented by the gray line in the chart below) is the sum of the real (or inflation-adjusted) rate of growth (blue bars) and the inflation rate (orange bars). You will see that in 2015, a year in which median income grew at a 5.3% nominal rate, there was almost no inflation (CPI was just +0.2%). Therefore, nearly all of the 5.3% nominal increase represented a gain in purchasing power. Since 2015, though, the inflation rate increased from 0.2% to 2.2% in 2017. At the same time, the nominal rate of growth in median income declined from 5.3% to just 3.9% in 2017. Therefore, the real rate of growth in median income decreased from 5.1% to 1.8% from 2015 to 2017 – not really trending in the right direction, especially following such a long period of stagnancy.
Source: US Census Bureau
There are a couple other issues to point out about the data on median family incomes. First, the data do not adjust for: 1) the number of people who are working in the typical household; and 2) the number of hours worked by each of those workers. In other words, the solid 12% increase in inflation-adjusted median family income from 2012 to 2017 could simply be the result of more workers per household working longer hours. Another metric we track is inflation-adjusted average hourly earnings. This metric is good because it not only removes the effects of inflation, but it also removes the effects of changing household size and hours worked. In the chart below, you will see that the year-over-year growth in inflation-adjusted average hourly earnings was flat for the past couple of months (with an actual decrease for July). This means that inflation has almost completely offset the gains in earnings in recent months.
Source: Bureau of Labor Statistics
So what conclusions can be drawn from all this? First, income for the typical American household grew at a respectable pace in 2017 (albeit down from the both 2016 and 2015). However, a good portion of that growth is coming from either a greater number of workers per household or a greater number of hours worked per employee. Secondly, and perhaps more importantly, rising inflation is increasingly offsetting the gains in income. The net effect is that growth in consumer purchasing power is slowing, and quite dramatically, for the typical American household. Moreover, these effects continued into 2018 as the growth in inflation-adjusted average hourly earnings slowed materially over the first half of the year.
Not all the news is bad. An unemployment rate of below 4% portents greater wage gains in the months ahead (we hope). In addition, the tax cuts will serve as a shot-in-the-arm for strapped middle-classers. However, suggestions that the economy is getting ready to blast off based on improved consumer financial health may be a bit of wishful thinking. For now, as has been the case for many years, the well-to-do are the primary beneficiaries of the economic expansion.