A new report from Sentier Research shows that household income still has not recovered from an almost 10 percent decline between 2009 and 2011 as a result of the global financial crisis and the U.S. recession. Median annual household income in July 2013 is virtually identical to its level in December 2011. This lack of progress on incomes is reinforced by meager improvements in the August employment report, which shows that the unemployment rate edged down to a still-high 7.3 percent.
Americans are under economic pressure, and they know it. In our article earlier this year, Whatever Happened to Old-fashioned American Optimism, we pointed out that consumer income expectations have been in a state of slow decline for decades. With the onset of the financial crisis, for the first time, the proportion of Americans expecting their incomes to fall in the future exceeded the proportion who expected their incomes to rise. More recent data show attitudes about future incomes are roughly split.
Americans are frustrated not only by the lack of good jobs and income prospects but also by a shrinking family budget, consumed by the rising cost of necessities and their inability to fund discretionary spending. Through the 1980s and until the early 1990s, consumers allocated 21 to 22 percent of their spending to discretionary items — spending over which they have some choice as to the decision and timing of purchase. By 2011, that share was down to 19 percent and falling (Chart 1).
Why the steady decline? Spending for such essentials as housing, health care and retirement savings is going up as a share of total spending. In 1984, when mortgage rates were three times higher than they were in 2011 (the most recent year for which data are available), the average consumer spent about 30 percent of their budget on housing. Today, with mortgage rates at near-historic lows, housing accounts for 34 percent of the family budget.
Recent reports show that median home prices are once again on the rise. At $257,000 in July, they are more than five times current median household income. In the early 1980s, median home prices (at around $75,000) were less than four times median household income. As home prices increase and income fails to keep pace, the number of Americans who can afford a home will decline, and the share of spending on housing will rise.
Similar pressures are evident in health care spending, insurance and savings for retirement. Health care spending, which has received a great deal of both media and policy attention, is up to about 7 percent (and probably higher) of total spending, compared to 5 percent in 1984.
Even more striking are increased costs of insurance and pension-related contributions. In 2011, personal insurance (i.e., life insurance, non-health insurance) and pension-related contributions accounted for 11 percent of the average consumer budget — up from about 8.5 percent in 1984.
In short, income growth has slowed while the “cost of living” — as measured by the average consumer’s spending on necessities — has risen. The average American household is not just in an income squeeze; it is in a budget squeeze with respect to the income it receives.
Well, you may say, these are averages. With growing income inequality in America, someone somewhere must be having fun. Actually, not so much.
All income groups have less discretion over their spending today than they did 20 years ago. The decline in the discretionary spending share among the highest income group (5th Quintile) is actually somewhat greater than for the other groups (Chart 2).
Rich and Poor
It is certainly true that the pressures on the various income groups differ. For the lowest quintile, the share of spending on transportation has declined while the shares for food and health care have risen — and in the case of housing, way up. For the highest income group, the shares of spending on food and transportation are down while those for housing and health care are up.
To be sure, the highest income groups spend proportionately less on each of these categories than do the lowest. However, the relative share of health care spending differs relatively little among the income groups, the smallest difference of any spending category (5.4 percent for the highest income group versus 6.7 percent for the lowest.
The most striking difference among the income groups is the budget share allocated to savings. For the lowest income group, the nominal dollar amount allocated for personal insurance and pensions has barely changed over 30 years, and the share has correspondingly declined to about only 2 percent of total spending.
For the top quintile, personal insurance and pensions accounted for 16 percent of all expenditures in 2011, compared to just over 12 percent in 1984. In other words, the top income group is allocating relatively more — actually significantly more — to pensions, both in dollar terms and as a share of their household budget.
While the decline in Americans’ tendency to save is viewed as a macro-economic issue, it is very much a kitchen table issue. Lower-income households allocate relatively little to the future in the form of insurance and pensions. Correspondingly, there has been relatively rapid growth in the number of lower-income households, which makes the national savings problem even worse.
There are certainly some who have essentially no income constraints. And as income rises, consumers certainly have more absolute spending power. However, all of this underscores the reality of spending choices that most Americans face, pressures that appear to intensify even during periods of economic growth.
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