America’s permanent recession: Is it coming to Australia?

It’s a never-ending ritual: many people hype current (and try to guess upcoming) national income statistics such as Gross Domestic Product – or heed those who do. The bigger is GDP and the more rapidly it rises, mainstream economists and policymakers strongly imply (and investors and journalists obediently accept), the healthier is the economy and the better are investors’ prospective returns.

This practice is pointless and myopic. It’s futile because there’s no clear or consistent relationship between GDP’s rate and direction of change and stock markets’ returns (see, for example, Three risks you can discount – and one you can’t). And in this article I demonstrate that the obsession with macro-level data ignores two crucial micro-level facts: 

1. Many American households’ CPI-adjusted, pre-tax income was little greater in 2019 than it was in 1989 – and in some instances has fallen since the GFC.
2. Most households’ wealth has hardly risen since 1989, remains at a low level and has sagged since 2007.

Over the past 30 years, America’s “real” GDP has grown almost 2.5% per year; net of CPI, in other words, it’s doubled. Yet only a minority of its households is now richer – and many are poorer – than they were then. In effect, and regardless of GDP’s size and rate of growth, during these three decades many households have endured a seemingly-permanent state of recession. That’s hardly the American Dream; it’s more an American Nightmare.

Is the situation nearly so dire in Australia? Probably not – yet – but we fool ourselves if we assume it’s greatly different. The lesson is obvious: investors should discount or ignore short-term changes of highly-aggregated national income statistics. These fluctuations tell you little of any relevance and obscure much of critical significance. 

The Fed’s Survey of Consumer Finances

This article summarises my analysis of the Federal Reserve Board’s triennial Survey of Consumer Finances (and secondarily of data compiled by the Australian Bureau of Statistics). SCF provides the most detailed, valid and reliable at a given point in time, comparable across the greatest extent of time and publicly-available estimates of American households’ finances. Every three years since 1989, it has provided detailed information about incomes, assets and liabilities. The Fed conducted its most recent SCF in 2019; the next one is now underway, and its data – which will quantify the effects of the COVID-19 lockdown and recession – will be released in 2023-2024. In my more idealistic younger years, I was astonished that the Fed and its acolytes in the mainstream media resolutely disregarded these data. In my more jaded middle age, I understand why: they tell an inconvenient truth. (My only remaining surprise is that the Fed continues to conduct the SCF.)

Importantly, the Fed’s and ABS’s surveys don’t repeatedly survey the same people; instead, they draw a new sample of different individuals every three years. To cite one of many examples: people aged 45-54 years in 1989 and 1992 aren’t quite the same people; some who qualified in 1989 were too old in 1992, and some who were too young to 1989 qualified in 1992, etc. We must therefore draw inferences carefully.

American Households’ “Top Line” 1989-2019

Figure 1 plots American households’ median pre-tax income. (One-half of households earn more than the median, and one-half less). It disaggregates income according to the age of the “reference person” whom the Fed contacted to complete the SCF. The categories of age are:

• 45-54 years (most adults’ prime income-earning years), 
• 55-64 (people nearing or possibly in retirement) and 
• 65-plus (probably retired). 

These and the following graphics remove the effect of “inflation” (as defined and measured by the Consumer Price Index); they thereby provide a long-term “apples-to-apples” comparison of the purchasing power of households’ income during this 30-year interval.

Figure 1: Median Household Pre-Tax Family Income, Stratified by Age, Thousands of Constant (2019) $US, 1989-2019

Four points are paramount:

1. since 1989, most American households’ pre-tax income has barely grown – and for some, it’s decreased;
2. the GFC was a watershed: before it, most incomes tended to rise; since then, most have stagnated and many have fallen;
3. if anything, the rot preceded the GFC; in other words, the GFC accelerated rather than caused the trouble: in households as a whole, as well as those whose reference person was aged 45-54 and 55-64, pre-tax income fell continuously from 2004 to 2013;
4. overall, household incomes haven’t just risen glacially; they’ve increased much more slowly than GDP (also measured in constant (2019) $US, Table 1).

The median American household’s pre-tax median income was $51,900 in 1989, $58,500 in 2004 and $59,100 in 2019. That’s a compound annual growth rate (CAGR) of 0.43% per year over 30 years. Before the GFC, the median household’s income rose 0.66% per year; since 2007, it’s risen by just one-tenth of 1% (0.10%) per year. Households whose reference person is aged 55-64 years, as well as Hispanics and holders of tertiary degrees, have suffered most since the GFC. 

Table 1: CAGRs, Household Pre-Tax Income, Stratified by Age, Schooling and Race

The 65-plus group is the only one which has fared continuously better over 30 years and escaped the GFC’s ravages: in these households, median pre-tax income has risen almost 1.5% year since 1989, and slightly faster since the GFC than before it. As a result, in 1989 their income ($30,100) was 58% of the median; in 2016 ($64,600) it was 85% (80% in 2019).

Table 1, which stratifies households along additional criteria (it omits others, such as family structure, etc., to which these same points apply), substantiates Figure 1. In virtually no case has household income risen as fast as GDP – and in most cases, it has greatly lagged GDP. It’s much better if the household’s reference person has a tertiary degree (median household pre-tax income of $95,700 in 2019) than just a high school diploma ($45,800) or no secondary certificate at all ($30,500). Yet since 1989 “tertiary” households’ incomes have grown even more slowly than those without any qualification; they’ve also fallen relatively rapidly since the GFC. Similarly, white households’ incomes are much higher ($69,200 in 2019) than blacks’ or Hispanics’ (both ca. $40,700); yet whites’ households’ incomes have grown much more slowly than minority households’.    

Figure 2: Median Household Pre-Tax Family Income, by Quintile, Thousands of Constant (2019) $US, 1989-2019

Over the past 30 years, American households’ incomes have mostly stagnated – and the incomes of more than a few have fallen. I’ve already noted that households whose reference person is aged 65-plus break this general rule. Similarly, although they’ve not grown as rapidly as “real” GDP, the pre-tax incomes of high-income households – those in the top quintile (20%) of income-earners – have grown much more rapidly than those of average- and low-income households (see Figure 2, which omits the lowest 20% of households because their pre-tax income is so low – $12,500 in 1989 and $16,300 in 2019 – that it’s barely visible).

In 1989, the median income of the top (#5) quintile was $163,000; in 2019, it was $221,000. That’s a CAGR of slightly more than 1% per year – less than the growth of “real” GDP, but much greater than the other quintiles. Further, in this top quintile the rate of growth during and after the GFC was almost as high as it was before the crisis; in the lower quintiles, post-GFC rates of growth have mostly collapsed (Table 2).

The numbers in Quintile #2 of Figure 2 are particularly sobering: in 2019, the median income of the distribution’s 20^th-40^th percentile was $35,600. In other words, half of this quintile (comprising 10% of all households) and all of Quintile #1 (20% of all households) – that’s almost one-third of all households – earned pre-tax incomes of $35,600 or less per year. Recent research corroborates this result: a month ago, Oxfam America published a study entitled The Crisis of Low Wages in the US. It found that 32% of that country’s workforce – almost 52 million workers – earns less than $31,200 per year. 

One-third or more of American households, in other words, comprise the “working poor.” The soaring prices of essentials – food, petrol and housing – have surely made it even more difficult for them to make ends meet. For decades (details omitted for the sake of brevity), they’ve tried to cope by borrowing. As a result, the lower is the household’s income the higher is debt relative to income. But rates of interest are now rising – which will also intensify the pressure upon low-income households’ finances.

Figure 3: Median Household Pre-Tax Income, by Housing Status, Thousands of Constant (2019) $US, 1989-2019

Figure 3 disaggregates household pre-tax income according to housing status. Since 1989, renting households’ incomes have grown more quickly than homeowners’ (Table 2). Yet home-owning households earn 20-30% more than the median, and 2.0-2.5 times more than renting households. In 2019, the medium income of home-owning households was $77,400; in renting households, it was $35,600. In the U.S., home ownership has become the preserve of the better-off.

Table 2: CAGRs, Household Pre-Tax Income, by Income and Housing Status

American households’ net worth 1989-2019

As Ronald Read’s biography forcefully reminds us, a household’s financial health doesn’t merely – or even primarily – depend upon its income: it’s more a matter of the assets it owns and the liabilities it owes. A household’s net worth – in other words, its wealth – is the value of what it owns (such as the family home and other real estate, cheque and other bank accounts, certificates of deposit and other loans, stocks, bonds and other financial securities owned directly and indirectly, pension and related assets, etc.) net of the value of what it owes (such as mortgages, credit cards and other debt, etc.).

Figure 4 plots American households’ net worth. As a counterpart to Figure 1, it disaggregates wealth according to the age of its “reference person.” Two points are most striking:

1. for most American households during the 30 years since 1989, wealth has hardly risen – and for large numbers, it’s fallen (the 65-plus category is again the major exception);
2. even more than pre-tax income, the GFC impacted wealth: before the crisis, most households’ net worth was rising; during the crisis, it plunged; since then, for most households, it hasn’t rescaled its pre-GFC maximum.

Figure 4: Median Household Net Worth, by Age, Thousands of Constant (2019) $US, 1989-2019

The GFC has cast a long shadow – which “emergency” measures enacted in and since 2020 surely won’t remedy and may well worsen. As a result, most American households’ net worth was lower in 2019 than it was on the eve of the GFC in 2007.

For the asset accumulator, time is a friend. The older is the reference person, the longer she has to accumulate assets; accordingly, the greater is her household’s wealth. In 2019, the median household’s net worth was $122,000; for those in the 45-54, bracket, the median was $169,000; for those 55-64, it was $213,000; and for those 65 or older, it was $261,000. Equally, however, for the economically vulnerable, financial crises are enemies. In 2007, the median household’s net worth was $149,400; by 2013, it had fallen to $89,400 (in other words, by 40%); in 2019, it “recovered” to $121,800. During the entire 30-year period, it rose at a compound rate of 0.87% per year; pre-GFC, its CAGR was 2.59%; since the GFC, it’s been -1.65%. 

Moreover, the younger is the household’s reference person, the greater and longer-lasting has been the GFC’s effect upon wealth. Since 1989, the CAGR of household net worth in the 45-54, 55-64 and 65-plus categories, respectively, is 1.89%, 0.29% and -0.48%. Pre-GFC, the CAGRs were, respectively, 3.55%, 3.82% and 0.88%; from pre-GFC peak to post-GFC trough, the respective CAGRs are -16%, -33% and -42%; and the post-GFC CAGRs are -0.55%, -3.11% and -2.65%. It’s not just most categories of age: similar results apply to all categories of schooling and race (for the sake of brevity I’ve omitted net worth’s counterpart to Table 1).

If most households’ wealth has stagnated and even shrunk, whose has grown? The 65-plus category has bucked the trend; so have high-income earners. As a counterpart to Figure 2, Figure 5 disaggregates households’ net worth according to its reference person’s pre-tax income (again, it omits the lowest 20% of households – Quintile #1 – because its wealth is so low – $3,800 in 1989 and $9,300 in 2019 – that it’s invisible).

Figure 5: Median Household Net Worth, by Pre-Tax Income, Thousands of Constant (2019) $US, 1989-2019

The results are stark: it’s a case of the top-20% (Quintile #5) of income-earners versus the rest: Quintile #5’s wealth is high and rising; in sharp contrast, Quintile 1-4’s is far lower, and is stagnant or even falling. Moreover, the wealth of high-income households relatively quickly recouped the losses it suffered during the GFC; the net worth of the other 80% hasn’t. In 1989, households in Quintile #5 were 5.6 times wealthier than the median household. In 2016, they were more than 10 times richer, and 8.2 times wealthier in 2019.

In 1989, the median household wealth of the top quintile of income-earners was $526,000; in 2019, it was $989,000; that’s a CAGR of 2.13% per year. Although this quintile’s rate of growth of wealth before the GFC (CAGR of 3.1%) was much higher than it’s been since 2007 (0.89%), its decrease from pre-GFC peak to post-GFC trough was relatively shallow (-14%). 

Figure 6 disaggregates household net wealth according to housing status. The results are startling and dispiriting:

Since 1989, the median wealth of home-owning households has been 1.9-2.4 times greater than the median of all households. In sharp contrast, the median net worth of renting households has never exceeded $8,000. That’s just 5% of the median wealth of all households, and 3% of home-owning households’ median net worth.

Figure 6: Median Household Net Worth, by Housing Status, Thousands of Constant (2019) $US, 1989-2019

It’s true that since 1989 home-owning households’ wealth hasn’t risen quite as fast as all households’ (CAGR of 0.81% and 0.88% respectively). The same is true pre-GFC (2.08% versus 2.63%); but since 2007, house-owning households’ wealth has sagged less than renters’ (-1.07% versus -1.69%).  

Conclusions and implications

Most investors pay close attention to short-term fluctuations of highly-aggregated national income statistics such as GDP. They infer – as many journalists and pundits strongly imply, and a few assert outright – that:

• a higher rate of GDP growth boosts equity markets, 
•  lower growth tempers return, and 
• recessions generate losses. 

Unfortunately, investors are largely mistaken: although this article didn’t provide details (they’re amply available elsewhere), in Australia nor other Western countries there’s no clear or consistent relationship between GDP’s rate and direction of change on the one hand and stock markets’ returns on the other.

No matter: virtually all investors ignore this key fact and nonetheless dissect the latest releases (or heed those who do). Perhaps they believe that these numbers somehow convey something meaningful. In a sense, they’re correct: national income statistics undoubtedly impart some vital information. Measured by its GDP (currently ca. $US22.8 trillion), the U.S. is unquestionably very wealthy. Indeed, it’s the world’s richest country. Ranked by GDP per capita, it’s also among the world’s top-10 richest nations. (At more than $60,000, it vastly outranks China – which languishes in 80th place at ca. $11,000, and in the future is unlikely to climb the per-capita rankings. Depending upon whose data – the International Monetary Fund’s or the World Bank’s – you use, Australia ranks #13 and its per capita GDP is in the range of $51,700-62,700).

 Yet “headline” GDP figures can be grossly misleading. If you dig below the surface – as the Federal Reserve’s Survey of Consumer Finances enables us to do – it’s clear that the U.S. has long contained an affluent minority that’s getting richer, an embattled middle class that’s not, and what’s possibly a caste of “working poor.” Can the U.S. really be a wealthy nation whose economy is “strong” and “recovering from the pandemic” if most of its households haven’t recovered from the GFC – or even the recession of the early-1990s – and many Americans’ prospects are grim?

America’s bifurcation between an ever more affluent minority and a struggling majority is hardly new; it’s existed for at least 30 years and likely much longer. As such, it’s simply naïve to think that there’s an easy or simple political solution to such a longstanding and deeply entrenched economic problem. 

Donald (“Let’s Make America Great Again!”) Trump neither caused nor reversed it, and Barack (“Yes We Can!”) Obama didn’t abate – let alone cure – it. Nor will Joe (“Build Back Better”) Biden. Regardless of U.S. GDP’s size and rate of growth over the past 30 years – or the partisan stripe of the President and Congress – many American households have long been enduring a permanent state of economic recession. Their experience resembles an American Nightmare more than the American Dream.

Is the situation nearly so dire in Australia? Probably not – yet it’s not greatly different. Using data compiled by the Australian Bureau of Statistics, Figure 7 plots Australian households’ average net worth over the past 20 years. The ABS’s data differ in several key respects from the Federal Reserve’s: they’re much less detailed; the series is shorter; data weren’t collected in 2007-2008 so the impact of the GFC is unknown; finally, these data use averages (means) rather than medians. (Because wealth and income data are usually heavily skewed to the upside, medians are more valid measures than means. Figure 7, in other words, significantly exaggerates Australian households’ wealth.) 

Yet the gist is unmistakeable: in Australia, the middle quintile (#3) wasn’t significantly richer in 2017-18 than in 2003-2004; Quintile #4, however, was – and the top quintile’s (#5’s) wealth increased almost 70%.

Figure 7: Average Australian Household Net Worth, by Quintile, Thousands of Constant (2017-18) $A

In private correspondence, a friend aptly summarised The Lucky Country’s unhappy underlying reality:

Australian households' net worth is mainly made up of the equity in home ownership ... Really only the top quintile own anything other than equity in their own house, those in the fourth quintile have some household equity but not much else, the third and fourth have little if any home equity, and the lowest quintile have, essentially, net negative wealth.

Is today’s state of affairs in Australia as dire as in the U.S.? Probably not – yet – but the chasm between economists’ aggregated statistics and many households’ actual experiences is increasingly evident. Paul Kelly (The Weekend Australian, 26-27 March) is ebullient: the “economic recovery ... is surging, and the budget will present that recovery in gold wrapping with embroidery – unemployment falling to a 50-year low ..., strong economic growth, jobs and spending during 2022, the budget deficit miraculously reduced and gross debt projections looking more manageable.” Solomon Lew, the billionaire businessman-investor, is even more upbeat. According to the same issue of The Weekend Australian, he “says he believes the nation’s macro-economic settings have ‘never been better’ with consumers flush with cash, unemployment low and shoppers ready to spend.”

The Australian (18 March) summarised matters from the point of view of many households: “the conversation among economists is a world apart from the one being held around the kitchen table. People, ironically, are more pessimistic about the economy than they were a year ago.” A key cause of their concern has been the stagnation of wages (see also Australia’s Bogus Boom). Robert Gottliebsen (The Australian, 30 March) alleges that the situation here echoes the one in the U.S.:

Australia has kept the lid on wages via a two-tier society where skilled workers have done very well while the unskilled and semi-skilled have usually missed out. They are bleeding and very angry.

Rising prices of food, petrol and power have also become a major issue. For many households, stagnant income and rising outgoings means even tighter budgets. Underlying and exacerbating these pressures is the widening and deepening chasm between the current fortunes and future prospects of homeowners and renters. 

Most Australian households’ wealth derives primarily from the high and rising price of residential real estate. Indeed, ours is one of the most highly leveraged home-owning societies in the world. Yet this is at best a mixed blessing: very expensive housing benefits a few but punishes a greater number. On a society-wide basis, it’s likely a net-negative.

Most concerning of all, these invidious trends may be becoming as deep-seated (and thus intractable) here as in the U.S. It’s not just lower-income earners and part-time workers: many full-time employees who earn median incomes can no longer afford to buy – or rent – a median-priced house. As a result, it’s no longer the homeless and unemployed: food banks and other charitable organisations cater to rising numbers of employed people whose costs of housing preclude three meals a day for themselves and their children. 

If what’s true in the U.S. becomes the case in this country, a substantial portion of households won’t be able to generate the financial and other assets they require in order to enjoy reasonably comfortable and secure working lives – never mind retirement. According to Claire Lehmann (“No Home, No Kids, and Nothing Left to Lose,” The Australian, 1 April),

Across the Western world, wealth inequality is being usurped by housing inequality as the most reliable indicator of disparity in society. For many people of my generation – especially those who wish to start or expand their families – housing affordability is likely to become the single most important issue ... in federal and state elections.

Let’s hope I’m wrong: Australian politicians have done – and in the future will be able to do – as much about stagnant wages and expensive residential real estate as American politicians have done over the past 30 years. In other words, they’ll achieve little or nothing, but it won’t be for want of effort. Never mind their rhetorical appeals to compassion and social justice: politicians routinely attempt to rob Peter in order to pay Paul. The fatal flaw of “redistribution,” to paraphrase the American economist, Thomas Sowell, is that you can only confiscate the wealth that exists today. You cannot commandeer tomorrow’s wealth, but you can easily weaken the incentives to accumulate it – which occurs when producers expect that the government is going to “reallocate” some of their output. As they’ve done in the U.S., in other words, so they’ll likely do in Australia: politicians will make today’s bad situation even worse.

Meanwhile, one key lesson for investors is obvious: heavily discount or ignore highly-aggregated national income statistics and the people who hype and dissect them. They (the “experts” as well as the statistics) tell you little of any importance and omit much of critical significance.

Unfortunately, and like their American counterparts, Australian policymakers show no sign that they’ll moderate their obsession – and every indication that they’ll remain resolutely myopic. Hence GDP and other highly-aggregated statistics will provide an ever more incomplete – and increasingly misleading – picture of the economic situation that many people in the real world actually confront.  

Wealth creators. Value investors.

At Leithner & Co, we believe in creating wealth through long-term consistent growth, built on trust, transparency and conservative and independent analysis. Our value investing approach allows us to learn from the past but keep an eye firmly on the future.

We are committed to helping you achieve the future you have in mind. For more of our insights, click the FOLLOW button below.