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Median Household Income Surged 5.2% In 2015 - Really?

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
September 20, 2016

1. Household Incomes Surged 5.2% in 2015, Largest Rise Ever

2. All Races & Age Groups Saw Their Income Go Up in 2015

3. If the Numbers Sound Too Good to be True, Maybe They Are

4. US Poverty Rate Fell to 13.5% in 2015, Now 43 Million People

5. Official Poverty Rate Doesn’t Include All Government Benefits

Overview

Today we’ll tackle last week’s annual report from the US Census Bureau on household income and the poverty rate in America in 2015. The report showed the largest annual jump in household income on record in 2015. The question is, was the big increase in household income due to a stronger economy, or was it due to the Census Bureau making changes to its methodology? I’ll give you the answer below.

Last week’s report also showed that the official poverty rate declined for all age groups and races last year. That’s certainly good news. But what we also learned is that if the Census Bureau calculated its poverty rate like most other developed nations, our poverty rate would be a fraction of the level reported last week. I’ll bet not one American out of 100 knows about this. I’ll explain it as we go along today.

Household Incomes Surged 5.2% in 2015, Largest Rise Ever

A surge in US incomes last year delivered the first significant raise for the typical family after seven years of stagnant or declining earnings – the result of sustained job growth finally lifting a broad swath of American households.

The median household income – the level at which half of households are above and half are below – rose 5.2% in 2015, or by $2,798 from a year earlier to $56,516, after adjusting for inflation, the Census Bureau reported last week.

The increase was the largest annual gain recorded since the yearly survey of incomes began in 1967, though it didn’t fully close the gap left by the last two recessions. Median household income stood 1.6% shy of the 2007 pre-recession level ($57,423) and 2.4% below the all-time high reached in 1999 ($57,909).

Median Household Income

“This is a big deal,” President Obama boasted last Tuesday at a rally for Hillary Clinton in Philadelphia. “Across every age, every race in America, incomes rose and the poverty rate fell. In fact, the typical household income of Americans rose by $2,800, which is the single biggest one-year increase on record,” he said.

Behind the pay hike is the big increase in employment, Census officials said. Some 3.3 million more Americans were working full-time, year-round in 2015, thus pushing up median income. Longer hours, higher wages and lower inflation also have contributed to the improvement.

One question now is whether a sustained upturn is under way, or whether these gains are likely to flatten as the economy nears full employment, especially given the continuing slide in worker productivity. At the current pace, median household income could surpass its 2007 level next year, ending a lost decade for many workers – if the latest figures are accurate.

All Races & Age Groups Saw Their Income Go Up in 2015

Here’s a breakdown of median incomes by race. Asian household incomes were the highest at $77,166; white household incomes rose 4.4% to $62,950; Hispanic incomes rose 6.1% to $45,148; and black incomes rose 4.1% to $36,898.

By age, households of those ages 45-54 had the highest median income at $73,857, up 4.2%; but households run by those ages 35-44 saw the biggest jump, up 7% to $71,417. And by gender, overall, men working full-time made more than women, but women saw a slightly larger increase in 2015.

The fact that median income was higher before the recession than today suggests that the recovery remains “somewhat slow and sluggish,” said Aparna Mathur, an economist with the American Enterprise Institute. There continues to be “slack” in the economy “with a large number of workers who are long-term unemployed or in involuntary part-time jobs. When this slack in the labor market diminishes over time, more households will see rising incomes, higher than before the recession."

If the Numbers Sound Too Good to be True, Maybe They Are

Last week’s annual report on US household income came as a major surprise to many economists and forecasters, yours truly included. There is little evidence in the economic reports we see month-in and month-out to suggest a rise in incomes of 5.2% last year.

Upon seeing such a surprise report, some observers alleged that the government must have “cooked the books” or intentionally fabricated the results – especially with this being an election year when a stronger economy favors the candidate of the incumbent party.

Yet when I see a surprise of this magnitude, I investigate to see if there was some significant change in the survey and/or the way the results were calculated. Sure enough, there were significant changes to both starting in 2013 and ending in 2014, which almost certainly explain why we saw such a big surprise in 2015 household income last week. Let me explain.

The annual income and poverty report from the government’s Census Bureau is drawn from a yearly survey which asks detailed questions about annual incomes – including wages, dividends, child support payments and government benefits. The survey, conducted in March with results released in September, is sent to around 95,000 households that are representative of the US population.

In 2013, the Census Bureau started to materially change the questions asked in the survey. In 2014, it also changed the methods used in calculating annual household incomes. The government began to ask more questions about how household income is generated. It also added more detailed answer options for survey questions in an effort to reduce “Don’t Know” responses.

There were other changes implemented in 2013 and 2014, but these two alone could have resulted in a considerably higher than expected increase in median household income in 2015. The Census Bureau actually admits as much in the footnotes to its latest report, saying: “The data for 2013 and beyond reflect the implementation of the redesigned income questions.”

The bottom line is that the Census Bureau moved the goalposts, and it resulted in the largest annual increase in history for median household income. Was it done for political reasons in a critical election year? Maybe, maybe not. We’ll never know.

Just remember, you read it here first.

US Poverty Rate Fell to 13.5% in 2015, Now 43 Million People

The same Census Bureau report that told us median household income rose by 5.2% last year also noted that the official US poverty rate fell to 13.5% in 2015, down from 14.8% in 2014. The report said there were 43.1 million people living in poverty last year, 3.5 million less than in 2014.

Poverty rate

The reported US poverty rate for 2015 was the lowest since 2008 when it was 13.2%. The last time the poverty rate went down more than a percentage point, as it did last year, was in the late 1960s. All age groups – children, adults and senior citizens – saw their percentage drop.

The United States determines the official poverty rate using poverty thresholds that are issued each year by the Census Bureau. The thresholds represent the annual amount of cash income minimally required to support families of various sizes (see below).

The methodology for calculating the thresholds was established in the mid-1960s and has not changed in the intervening years, other than an annual update to account for inflation.

A family is counted as poor if its pretax money income is below its poverty threshold. Family income does not include non-cash benefits such as public housing, Medicaid, employer-provided health insurance, food stamps, etc. I’ll come back to this important fact below. 

While the poverty rate fell for all races in 2015, it remains high among people of color. Some 24.1% of blacks and 21.4% of Hispanics were in poverty last year, while only 9.1% of non-Hispanic whites were. The poverty threshold for two adults and two children was just over $24,000 last year.

2015 Poverty Thresholds

The poverty rate for children under age 18 dropped 1.4% in 2015, from 21.1% to 19.7%. Rates for people aged 18 to 64 dropped 1.1%, from 13.5% to 12.4%. Poverty rates for people aged 65 and older decreased 1.2%, from 10.0% to 8.8% last year.

Official Poverty Rate Doesn’t Include All Government Benefits

The United States has a reputation for having one of the highest childhood poverty rates in the developed world.  In fact in a UNICEF study back in 2012, the US ranked 34th out of 35 OECD nations in child poverty at 23.1% per the Census Bureau.

It is important to recognize, however that the Census Bureau’s official poverty rate does not include non-cash government assistance such as food stamps, housing vouchers, refundable tax credits and other government benefits which in reality have helped lift many Americans out of poverty.

Put differently, the real poverty rate in America is a fraction of the 13.5% reported last week.

You see, the Census Bureau counts all the people who are actually in poverty plus those who would be in poverty were it not for government assistance.  Thus it simply is not the number of people living in poverty – it’s the number who would be, if the government didn’t give benefits to the less fortunate.

Let me be clear, income from unemployment insurance, Social Security, cash welfare, earnings from jobs and pensions are all considered cash income and are counted toward the poverty measure for each household. Yet the Census Bureau deliberately does not include any benefits in goods or services, or consider the influence of the tax system which favors lower income Americans.

The four major things we do to alleviate poverty are Medicaid, SNAP (food stamps) and Section 8 housing – all of which are vouchers or goods and services in-kind – and the Earned Income Tax Credit (EITC) – which is through the tax system.

We actually spend some $800 billion a year on these and other smaller programs like free school lunches and so on. $800 billion is real money even in an economy the size of the US. That’s going to alleviate at least some poverty. Actually, it’s a lot. People familiar with these numbers call it the Adjusted Poverty Rate.

Forbes economic and finance columnist Tim Worstall illustrates the effects of including all sources of income to calculate the poverty rate using 2013 data:

Real Poverty Rate

Worstall estimates that since the official poverty rate fell from 14.8% in 2014 to 13.5% last year, the adjusted poverty rate was around 4.5% in 2015.

Worstall also believes that the child poverty rate reported last week at 19.7% – using the same income methodology as above – would actually be in the 2½-3% range.

In fact, the Census Bureau acknowledges the Adjusted Poverty Rate methodology in the footnotes to its latest annual report. Most developed nations use this (or a variation of this) methodology to estimate their poverty rates.

Yet the Census Bureau chooses not to consider all forms of family income/benefits in calculating the official poverty rate for reasons I don’t understand. If it used the Adjusted Poverty Rate, the US would have one of the lowest poverty rates in the developed world.

I must admit that I didn’t know this information until I did the research for this section on last week’s poverty rate report. I’ll bet not one in 100 Americans knows that the adjusted poverty rate is only apprx. 4.5% versus the headline rate of 13.5%. Or that the adjusted child poverty rate is only 2½-3% versus 19.7%. That’s great news!

Now you know.

One last thing: The Fed is meeting today and tomorrow to decide whether to raise the Fed Funds rate. I continue to believe a rate hike will not happen tomorrow, but there is some last-minute speculation that Yellen & Company could surprise us tomorrow. There’s an article in the links below which stakes out where the FOMC voting members stand, if you’re interested.

There is another article in the links below from one of my favorite writers, Victor Davis Hanson, entitled The Republican Dilemma. It is aimed at the so-called “NeverTrumpers” and some in the GOP Establishment that vow not to vote for Trump. Hanson eloquently argues that they are committing Party suicide if they truly don’t vote for Trump. It’s long but well worth it!

Finally, a recorded version of our Alpha Advantage Strategy webinar is now available on our website. Given how well this program is doing this year – as compared to the S&P 500 Index – you really should listen to this informative webinar with the Trading Manager.

All the best,

Gary D. Halbert

SPECIAL ARTICLES

Very little actual poverty exists in the US

Where Fed officials stand on a September rate hike – not likely

The fight isn't going Clinton's way (very interesting)

Victor Davis Hanson: The Republican Dilemma (must read for NeverTrumpers)

 


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Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc. Gary D. Halbert is the president and CEO of Halbert Wealth Management, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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