Given all the talk from politicians about helping the overburdened middle class, one would think that middle-class Americans are in dire financial straits. If so, it's not for a lack of income.
Data from the Census Bureau shows that the median household income of Americans hit a new record high in 2016. The new median income value of $59,039 represents a 3.2% increase over 2015, maintaining some of the momentum of a 5.2% increase from 2014 to 2015. The collective growth in median income over this two-year period is the largest since the 1960s.
In addition, the Census Bureau reported that the nation's poverty rate dropped from 13.5% to 12.7%. The 2016 rate is virtually the same as the pre-recession poverty rate from 2007. Both the median income and poverty rate changes suggest that our slow economic recovery is nearing completion.
A record-high middle-class income and lower poverty rates should be good for the U.S. economy – but there's a bit more to the story. Our economy is approximately two-thirds driven by consumer spending. It's important that people have enough income above their basic needs to engage in the discretionary spending that drives the economy. They should also have enough confidence in the economy to feel comfortable shifting funds from savings to spending.
The changes in middle-class income are not necessarily driven by wage growth. For almost five and a half years since the end of 2009, monthly wages for all non-farm employees had stagnated near 2% year-over-year growth. Since that time, year-over-year wage growth has steadily increased to close to 3% in September of 2017 – decent progress, but not enough to account for the overall income increases.
The main driver is an increase in jobs. More people are landing full-time jobs, shifting the median wage value upward. Unemployment dipped below 5% in 2016 for the first time in nine years. The rate has continued to slide since then, reaching 4.2% in September 2017.
New hires are likely to provide a temporary spending boost, having gone from low or no income to a steady salary – but they also are likely to be cautious with discretionary spending until their situation stabilizes. Wage increases for those who are already working raise the overall level of discretionary income available for spending (assuming those increases are greater than inflation).
Wage inequality is another confounding factor. According to the Census Bureau report, the Gini coefficient (a measure of income equality on a scale of 0-1) was 0.481, virtually the same as last year – but that level can produce profound differences in discretionary income.
Income gains for middle-income households grew 2.8%, while the top 5% of earners had a 5.6% increase in income. Those with higher incomes tend to shift more to savings and investments than spending – in general, they already have sufficient discretionary income for their preferred spending levels.
Income increases may be neutralized by inflationary costs and expenses, but they may also be erased by taxes. It's unclear how the Trump administration's tax proposals will affect the economy, but it's safe to say that their decision on taxes may well dwarf the effects of the rise in median incomes – for either the positive or the negative – which directly affects available discretionary income.
Overall, increased middle-class wages are a positive sign for the American economy. However, there is more work to be done to bring the economy back to full strength and give middle-class Americans sufficient discretionary income to help drive the economy. Rest assured that politicians will be aiming their messages toward middle-class Americans, claiming to raise their income, lower their taxes, and make their purchasing power as high as possible. Let's see what the politicians actually do.
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