03/24/2022
Incomes and Inflation: Perception vs. Reality
If you watch the news long enough, you will hear politicians tout a great economy over the last few years, a healthy stock market, low unemployment, and wage growth. Of course in 2020 our world was hit with the dreaded C-19. Not only did many die, but businesses closed, people lost jobs, and the government passed a massive stimulus bill to keep the economy from plunging into a deep depression.
Now, we have heard that we have recovered and inflation is just temporary. We see talk of the Fed raising interest rates to reduce inflation, the stock market correction, and a possible pending recession. But unless you are an investor, you may not think any of it is a big deal or will really impact you. After all, the Fed, politicians, and the news say the economy is doing great and would be strong were it not for supply chain issues and the unrest overseas….right?
Many of us know that economies go in cycles of expansion (growth) and contraction (decline), and these cycles tend to peak about every 10 years. When the economy overheats and then stagnates and declines, we experience a recession. Some recessions are worse than others, and certain pockets of the economy do worse than others.
Recessions tend to last 18 to 24 months, and then we start to recover and breathe easier. When the pain is over, we hear about growth, find new jobs, start getting pay raises and feel like we are on the upswing and finally starting to get ahead. We start spending again, start borrowing again, start investing again, and finally start to grow wealth. At least it seems that way.
Since we have had the longest growth or expansion period in American history (over 11 years), you would think Americans are WAY better off than we were in 2007 just before the Great Recession. You would think we are way better off than we were in 2000 with the dotcom / tech bubble crash before that, which ended a 10 year extensive growth period since the 1990 recession. Since the 1960s, we’ve had recessions about every 7 to 10 years. Each time, we are told the Federal Reserve via Monetary Policy and Congress via Fiscal Policy will come to the rescue and make things better, fix them so they don’t happen again, and make the American people better off during the next expansion period.
So let’s look at how the American people have fared through the last several recessions to today. How have economic policies improved life for Americans over time, and how has inflation impacted wealth and incomes? Here are a few sobering stats.
According to the Pew Research Center, in 2018 inflation adjusted dollars, the average Household incomes in each year before recession looked like this:
1989: $64,200
1999: $70,500 (9.8% increase; less than 1% year increase)
2007: $70,400 (0% increase in 8 years)
2018: $74,600 (6% increase; 0.54% per year increase)
From 1989 to 2018, a full 30 years, average household incomes increased by only 17.75%, or 0.59% per year! But from the last 20 years, 1999 to 2018, incomes grew by only 5.8%, or 0.29% per year!
If the head of household has a bachelor’s degree, your family made more income, but income increases were worse:
1989: $106,900
1999: $117,800 (10.2% increase; just over 1% year increase)
2007: $115,700 (2% DECREASE in 8 years)
2018: $116,500 (0.69% increase; 0.06% per year)
From 1989 to 2018, a full 30 years, average household incomes increased by only 8.98%, or 0.3% per year! But from the last 20 years, 1999 to 2018, incomes have decreased!
And wages from 2019 to today regardless of income level are about flat, despite news of higher pay demands.
What this means is that despite an appearance of rising incomes, on an inflation adjusted basis, American households are almost no better off despite 3 long recovery and expansion periods.
In 2018, 52% of American households (down 10% of households since 1970) were considered Middle Income (making $48K to $145K per year), 29% were lower income (making less than $49K per year), and 19% were upper income (making over $145K per year).
In the last 20 years, regardless of whether you are lower, middle, or upper income households, your wages have been essentially FLAT with inflation averaging less than 2.5% average per year over the last 30 years!
This doesn't take into account that CPI (or inflation on household purchases) may be underestimated and such costs could be quite a bit higher than the formal inflation rate. If so, flat wage growth could actually be negative.
So unless you have been an investor, adding to your net worth, despite incomes being flat, most Americans regardless of income level are no better off in the last 30 years.
Let’s now look at wealth growth in the same time period:
The Median Wealth of US families was $83,000 in 1983 and only $87,800 in 2013. The good news is that Median jumped to $121,700 in 2021 (38% in 8 years or 4.8% annually) thanks to increases in home values, retirement accounts, and investments.
If you have a degree, your net worth is 4X that of someone without it.
Most of the rise in net worth is attributable with a rise in home values. In 2020, real estate accounted for TWO-THIRDS (66%) of net worth in the US! If you have been a real estate investor, your net worth has risen substantially!
One key takeaway from 30+ years of data is that the average American family does not get ahead by working for a good company and getting raises that barely keep up with inflation.
And we haven’t seen inflation as high as it today in over 40 years. If you aren’t finding ways to invest, you are going backwards.
Another takeaway is that if we are in an “Everything Bubble” (as many investors and economists believe), with asset values inflated due to low interest rates over the last 15 years since the Great Recession, a lot of this growth in wealth could come down. You need to consider how to “capture” that value and store it safely before it potentially comes down. Then figure out how to invest it to grow your income and net worth further in the future.
I am grateful that when 2008 hit, I was losing my job, my husband was losing his business, and my 401K was almost wiped out. It forced me to take a hard look at income and wealth, and how to stay afloat and thrive when everything was falling apart. I’m grateful that I started aggressively studying and investing in real estate even with NO money. I am very blessed to have figured it out. And as a result of investing in real estate, my income and net worth has gone up significantly when most employees’ incomes and net worth stagnated. That doesn't make me better, but it makes life much easier. I don't take that for granted and it is why I am passionate about helping others on this journey!
While real estate has risks, doing what the majority of the population does, and relying on a job alone, while inflation eats away at your income and net worth, has a lot of risk as well. Real estate has created 90% of the world's millionaires. There is simply nothing like it.
If you make a commitment to learn and take baby steps into real estate even when the economy flounders, especially if the economy flounders, 10 years from now you may be a lot better off financially, when many others may be hurting and struggling once again in the next cycle.
Stay tuned for more on how to invest WISELY, slowly, and methodically to (as Dave Ramsey says) “change your family tree” or the sobering statistics above!
Next, I will talk about the Federal Reserve and fiscal policies that have enriched investors and companies while the average American household is not much better off in the last 50, 30, or even 10 years.
A. Kelley, Investor
