Median Household Incomes: The "Real" Story

by: Doug Short

The traditional source of household income data is the Census Bureau, which publishes annual household income data each September for the previous year.

Sentier Research, an organization that focuses on income and demographics, offers a more up-to-date glimpse of household incomes by accessing the Census Bureau data and publishing monthly updates. Sentier Research has now released its most recent update, data through September (available here as a PDF file). The data in their report differs from the Census Bureau's data in three key respects:

  1. It is a monthly rather than annual series, which gives a more granular view of trends.
  2. Their numbers are more current, the latest through October 2012. In September, the Census Bureau released the 2011 annual numbers (going on nine months into the next year).
  3. Sentier Research uses the more familiar Consumer Price Index (NYSEARCA:CPI) for the inflation adjustment. The Census Bureau uses the little-known CPI-U-RS (RS stands for "research series") as the deflator for their annual data. For more on that topic, see this commentary.

Sentier makes the data available in Excel format for a small fee (here). I have used the latest data to create a pair of charts illustrating the nominal and real income trends during the 21st century.

The first chart below chains the nominal values and real monthly values in October 2012 dollars. The red line illustrates the history of nominal median household income in today's dollars (as of the designated month). I've added callouts to show the latest value and the real monthly values for the January 2000 and the peak and post-peak trough in between.

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The blue line in the chart above paints the grim "real" picture. Since we've chained in October 2012 dollars and the timeframe has been inflationary, the earlier monthly values are adjusted upward accordingly. In addition to the obvious difference in earlier real values, we can also see that real incomes peaked before the nominal (January of 2008, one month after the recession began, versus July 2008). Also the real post-recession decline bottomed later than the nominal (August 2011 versus September 2010).

The next chart is my preferred way to show the nominal and real household income -- the percent change over time. Essentially I have taken the monthly series for both the nominal and real household incomes and divided them by their respective values in January 2000. The advantage to this approach is that it clearly quantifies the changes in both series and avoids a common distraction of using dollar amounts ("How does my household stack up?").

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The stunning reality illustrated here is that the real median household income series spent most of the first nine years of the 21st century struggling slightly below its purchasing power at the turn of the century. Real incomes (the blue line) peaked at a fractional 0.8% in early 2008, far below the nominal illusionary peak (as in money illusion) of 27.5% six months later. Also the real recovery from the trough has been depressingly slight. In fact, the trend since the post-trough interim peak in December 2011 has been one of slight decline, although we may be seeing bottoming process underway. Time will tell.

Let's take a closer look at the monthly data since the end of the Great Recession. The adjacent chart highlights the real monthly median values since 2008. The right axis shows the same scale as the chart above -- the percent change from the January 2000 real household income value. The October median income ($51,378) is virtually unchanged from September ($51,418). The $40 decline is statistically insignificant. This metric has been essentially flat since June, with what appears to be an outlier dip in August. At this point, we see no clear direction as we enter the final months of the year.

Is there seasonality to the monthly data? The column chart shows the monthly averages of nominal month-over-month change since 2000. The weak data we saw for August fits with the track record of this month, which has weakest average since the turn of the century. However the month-over-month volatility of the Consumer Price Index reduces the reliability of the nominal pattern as a clue for what to expect in the closing minths of 2012. For this reason, the next Sentier Research update will be most eagerly awaited in helping us determine the trend.

In Summary...

As the excellent data from Sentier Research makes clear, the mainstream U.S. household was struggling before the Great Recession. At this point, real household incomes are in significantly worse shape than they were over three years ago when the recession ended.

I'll close this update with another look at real growth, highlighting the actual monthly data points and adding a three-month moving average. In the months ahead, this moving average should help us identify the emerging trend.

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Check back next month for the latest update.