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Monday, September 23, 2013 2:20 PM

Illusion of Prosperity: Deflating the American Dream; No Recovery in "Real" Income

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In The Morning After; Price Discovery is Zero; PUT on the Bond Market? Is Inflation Really Under 2%? I posted a chart with a caption of "wages" but the corresponding chart showed "income".

The post is now fixed, but newer data has come in, and Doug Short at Advisor Perspectives has updated charts that I would like to share.

click on any chart for a sharper image

From Median Household Income Growth: Deflating the American Dream, by Doug Short.

What is the single best indicator of the American Dream? Many would point to household income growth. My study of the Census Bureau's data shows a 600.7% growth in median household incomes from 1967 through 2012. The ride has been bumpy, but it equates to a 4.5% annualized growth rate. Sounds impressive, but if you adjust for inflation using the Census Bureau's method, that nominal 614.2% total growth shrinks to 18.8%, a "real" annualized growth rate of 0.39%.

But if we dig a bit deeper into the method of inflation adjustment, the American Dream looks more like an illusion, as in "money illusion".

The data for the charts is from Sentier Research. Sentier uses the CPI as the deflator for computing their real household income data series.

The above chart goes back to 1968. It shows that income growth since 1968 is nearly all inflation. Closer scrutiny shows "real" income growth has been negative since the year 2000.

Incredible Shrinking Income

Please consider this chart from Real Median Household Incomes: Another Monthly Decline by Doug Short.

Real median incomes are down 7.3% since 2000. That means at least half of the population is worse off now than 13 years ago!

Think the CPI is a flawed measure? Doug Short has a comparison using different deflators, including the Alternate-CPI from John Williams' Shadowstats.

Doug comments "The Alternate CPI is a rather bizarre outlier. What this deflator is telling us translates into something like this: The 1967 median household income of $7,143 chained in 2012 dollars would have had the purchasing power of $185,588."

By the way, a close look at the above chart shows that the Williams' deflator is 72% since 1989, not all the way back 1967!

Although it's easy to believe CPI is off somewhat, "bizarre"  is a polite description of how far off Williams is in the other direction. And Williams' views of hyperinflation in the US and when it is likely, go far beyond bizarre to the point of absolute ridiculousness.

No Recovery in Real Economy

While Bernanke can talk of "recovery" things started deteriorating badly, not in 2008 but all the way back in 2000. The stock market is back to previous highs, but the real economy sure isn't.

Mike "Mish" Shedlock

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