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Average Consumer Catches a Break as Household Income Surges

suburbs fed
suburbs fed

Median Household Income Surged 5.2% in 2015, the best growth rate ever recorded. Seldom does a boring statistic from the Census Bureau tell such a powerful story, as things are finally starting to get better for everyday Americans.

Gold medal in growth

For millennials, household incomes rose for first time in our adult lives in 2015. Many are saying we’ve finally dug ourselves out of the pit of desperation that was created by the financial crisis of 2008. The good news is that we haven’t seen this type of growth rate since record keeping began in the 1960s.

Most of the gains from recent economic growth haven’t been broadly shared by the “masses,” so this is a radical reversal of trends. On the heels of this bombshell good news, you might say shared prosperity is finally taking root again after a long hiatus.

The Wall Street Journal Reports:

Income gains were spread across nearly all age groups, household types, regions and racial or ethnic groups. One exception: Incomes didn’t rise for households living outside metropolitan areas.

The New York Times Reports:

The details of the bureau’s report revealed that the gains last year were both broad and deep. Notably, lower-income households saw the largest income gains in percentage terms.

The reversal of a dispiriting trend

Adjusting for inflation, most of us have grown poorer since household income peaked right before the Great Recession in 2007. Many believe this dispiriting reality of declining living standards has been the catalyst of the rise of angry, extremist politics; “Americans haven’t gotten a raise in decades,” is commonly splashed across the papers and cited in campaign speeches.

Until this latest news, there seemed to be little evidence, or even hope, that trends would reverse themselves. This was extremely concerning on many levels, as a financially bludgeoned American middle class is not good for anyone, anywhere.

The United States’ economy is overwhelmingly driven by consumer spending, so if the average consumer is struggling, it is likely that economic growth is sluggish as well. It doesn’t take a PhD in economics to figure out why economic growth rates since the Great Recession have been alarmingly low: the average consumer has to recover for the overall economy to register strong growth

What does this mean for the Fed?

The latest news seems to vindicate the activist policies of the Federal Reserve. The institution in charge of monetary policy kicked off its highly experimental monetary policies during the financial crisis, including lowering interest rates to near zero. While a zero-interest rate policy seems normal to millennials, it is important to remember that it was earth shattering at the time.

The “Audit the Fed” crowd feared inflation, or run-away rising prices. That fear never really materialized. Instead, we’ve seen extremely healthy job growth, precisely what the Federal Reserve set out to do. The tightening of the labor market is largely responsible for this good news, and Americans are finally beginning to feel the difference in their pocketbooks.fed-picture

 

What next for the economy and the Fed?

Amidst the exuberance, there is still the hard reality that we’re still not completely recovered from Great Recession; median income is still below its 2007 peak. Poverty is still a huge problem for a huge swath of the population, while distribution of income remains skewed toward the top. Income is up because more people are working, not because ordinary working folk are making more money.

The debate will rage on in Washington about the proper next steps for fiscal and monetary policy. Everyone will be watching for more recent economic news to gauge the health of our economic prospects. Further news on this front will feed the controversy around raising interest rates, and whether the Federal Reserve should wait longer to allow more recovery before abandoning its ultra-loose monetary policy.

janet-yellen

Others will make the case that now is the time to raise interest rates, that this is the meaningful recovery that everyone has been waiting for, and it’s time for the Fed to return to normalcy. A tightening labor market worries some, as that may lead to inflation.

Takeaway

The bottom line is that the economy in America is much better than it was a few years ago, but it is still far cry from what it was in the go-go 1990s. A good 2015 is much appreciated, but we desperately need sustained household income growth in order to bring back a 1990s-like economy.

 

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