There is a fascinating study at Pew Research on how income and expenditures have recovered since the Great Recession. The graph above illustrates both. As you can see real expenditures are just about where they were in 2007. Real income has not fared so well. Here are Pew’s remarks:
From 2004 to 2008, median household income grew by only 1.5 percent,3 while median expenditures increased by about 11 percent. During that period, the expenditure-to-income ratio (the percentage of a household’s budget used for spending) jumped by 9 percent. As the recovery began, median household expenditures returned to pre-crisis levels, but median household income continued to contract. By 2014, median income had fallen by 13 percent from 2004 levels, while expenditures had increased by nearly 14 percent. This change in the expenditure-to-income ratio in the years following the financial crisis is a clear indication of why and how households feel financially strained.
The different class of expenditures have not all increased at the same rate:
A number of things jump out from that graph. Two classes of expenditures, healthcare and housing, have grown substantially relative to income since 1996. And most of that growth has been since 2012. Spending on food as a share of income has essentially been flat since 1996 while spending on pets, toys, and entertainment has decreased a tiny bit as a share of income.
How can real expenditures have increased so much while real incomes barely increased at all? I think the most likely explanation is that prices in healthcare and housing have continued to rise and supply and demand has taken care of the rest.
How can expenditures be outstripping income? It’s possible that people are dipping into nonexistent savings but by far the more likely explanation is the substantial increase in credit card debt that has occurred over the period.
A couple of other things from the study. The lower third of income earners are actually worse off now than they were before the Great Recession. Rent now consumes half of their incomes, a shocking figure.
Do these results fit your idea of a robust and sustainable recovery? The business cycle has still not been repealed. What do you think is going to happen in the next inevitable recession?
My prescription, as it has been for some time, is that healthcare spending must be not merely controlled but actually brought down and we need to create a lot more jobs that pay more. Neither of these things look particularly likely without major changes in policy.
Have to say that I am a bit skeptical about the numbers. The expenditure to income ration stays between 55%-60%, it was actually dropping a bit since 2011, then suddenly shots up in 2014. Looks more like a methodology change, or something. Most of it looks like expenditure. What suddenly made expenditures increase so much in 2014?
Also, please note that the percentage growth for housing, food and health are probably about the same (food might be highest), with transportation lagging a bit. Need real numbers to be sure, but looks like food went from 2% to 3% of income (50% increase) while housing went from 21% to 25% (20% increase). Unless you index things back to zero you get what look like much more rapid increases compared with items that start with a lower baseline.
Steve
Also, I hope you saw this. If these ratios were true, I would expect the GSS numbers and consumer sentiment to be much worse.
http://www.nytimes.com/2016/04/03/upshot/american-anger-its-not-the-economy-its-the-other-party.html?partner=rss&emc=rss&_r=0
Steve
I suspect the decoupling of expenditures and incomes in the 2004 – 2008 time frame reflects the use of home equity or higher permitted loan to value – aka homes as piggy banks – to support expenditure levels. I’d also bet that the persistent decoupling does indeed represent a simple rotation in financing vehicle to credit card debt. Numbers routinely published at zerohedge would support that. I, too, admit that the sudden jump in 2013 looks odd, but I think that in the widening gap what you are seeing is mandatory expenditures for health care, food and housing crashing headlong into a part time job/waiter and bartender job “recovery.” Again financed by revolving credit. Similarly, cars are increasingly being financed by subprime loans and with extended tenor, enabling an expenditure income mismatch.
There is really no reason to not use 1996 as a base period. Using 1997-1998-1999 etc would give essentially the same result. I’ll bet going backwards a few years similarly changes nothing. Because the point is simply to compare then and now it works. The proper math (by my eyeball) would be 4/21 for housing. That’s a 19% increase. 1.5/11 for food. That’s a 14% increase. 1/2 for health, or up 50%. Fido, silly putty, and bus tickets seem to not have moved much at all.
Why they haven’t included education is beyond me. And aggregate taxes, user fees, license fees etc. The NYT can say what they want, but an awful lot of people are in a world class vise right now. I’m not seeing how health care, education, government taxation etc, housing or food take a dive right now. I just don’t see it. This turnip is getting pretty dry.