A Paradox: U.S. Growth and Who Got Left Behind

By Matthew Shaw

Absent geopolitical or market surprises, the current U.S. expansion will by summer be the longest consecutive period of economic growth on record.  That’s the good news.  The toxic side-effect of all this prosperity:  how little of it is equitably shared and how angry that makes the majority of Americans ahead of the next election.  If income and wealth growth over the 2016-2019 period tracks 2010 to 2016, then the middle class will be no better off in 2019 than 2001 even with almost a decade of aggregate growth.

Disaggregated data from the Federal Reserve triennial Survey of Consumer Finances (SCF) show clearly that middle-class households have fallen further behind higher-earning ones during the post-crisis recovery.  While top U.S. earners now exceed their pre-crisis highs in terms of both income and wealth, the middle class will need to see significant gains in both income and wealth growth rates over its post-crisis average just to get back to where it was in 2007.

Below, we assess trends in both income and wealth across the income distribution, showing not only that inequality is increasing, but that this increase can be attributed to gains by those at the top and losses for the rest of the distribution.

Income

Headlines at the start of 2019 happily proclaimed that worker wage gains hit their highest level in a decade: over three percent.  Unfortunately, this fails to account for inflation, 1.9 percent last year according to the BLS.  In real terms, wages rose only about one percent – better than nothing, but not nearly enough to make up for the real – that is, inflation adjusted – overall income all but the top quintile of households lost.

Wages are only one component of income, but for most households, they make up the bulk of household income.*  From 2010 to 2016, the top ten percent of earners’ median income increased by 14.7%, while the bottom four quintiles could only muster single-digit growth.  What is truly startling, however, is that the middle three quintiles have median incomes that, on an inflation adjusted basis, remain lower not only than their pre-crisis highs, but also their 2001 levels (i.e., before any bubble associated with the run-up to the financial crisis).  With specific regard to the middle quintile, median real income since 2001 is down 2.6% and stood at $52,700 in 2016, while the top ten percent’s median income has risen 13.2% to $260,200 over this same period.  Were the middle quintile’s median income to grow between 2016 and 2019 at the same rate as between 2010 and 2016, then it would still remain below its 2001 level when adjusted for inflation.

Importantly, real dollars are also at stake.  While median income is up for all quintiles since the end of the crisis, this growth has not been even, as shown in the chart below. 

Median value of before-tax family income:

Source: Federal Reserve Survey of Consumer Finances (2016)

Wealth

While these income data are startling, the wealth data contained in the SCF are downright frightening. As with income, the top of the distribution has now regained the wealth lost during the financial crisis: the top-ten percent of earners increased their median net worth in real terms by 24.3 percent between 2010 and 2016, with the next ten percent increasing their median net worth by 23.3 percent. 

As for everyone else? 

The middle class – those households whose incomes fall in the middle quintile of the income distribution – increased median net worth by 12 percent; the lowest quintile became 4.4 percent poorer.

Not so bad for the middle class?  Importantly, Americans start from very different places, making the differences in wealth-growth levels all the more meaningful in terms of real prosperity measured in real dollars adjusted for inflation.  The median net worth for the top ten percent was already at $1.3 million in 2010 prior to growing to $1.6 million – the highest median reported in any SCF – over the next six years.  This is also considerably above where it stood in 2001 ($1.1 million). 

Median middle-class wealth was only $72,800 in 2010, rising to $81,500 by 2016 but still $4,700 below its 2001 level.  Thus, when middle class households say the economy isn’t working for them, they’re not wrong; real median wealth was lower in 2016 than it was in 2001 for all but the highest quintile of earners.  If median middle quintile net worth continues to grow from 2016 to 2019 at its 2010-2016 rate, then it will eclipse its 2001 level, but just barely.  Regardless, the negligible growth projected over almost two decades pales in comparison to the top ten percent’s median wealth increase of more than half a million dollars between 2001 and 2016 and projected increase of $710,000 from 2001 to 2019.  As always, it’s important to note that median wealth data in the top decile are misleading due to the significant concentration of assets in the top one percent  ($17.6 million average wealth) and significant wealth-reporting challenges as assets ascend to the stratosphere.

Median value of net worth:

Source: Federal Reserve Survey of Consumer Finances (2016)

Conclusion

Something’s different in the post-crisis era that has fundamentally altered how the middle class has recovered compared to previous recessions.  Growth rates for top decile median wealth vary greatly from report to report and are likely idiosyncratic because the wealthy depend on financial activities for a significant portion of this growth, introducing significant volatility.  However, middle quintile median wealth since 1989 – the first year the Fed conducted the triennial SCF in its current form – had experienced relatively constant growth since the end of the recession in the mid-1990s, growing 18.9 percent from 1992 to 1998, 18.6 percent from 1995 to 2001, 16.1 percent from 1998 to 2004 (despite the 2001 recession), and 18.3 percent from 2001-2007.  From 2010 to 2016, middle quintile median net worth as noted above grew 12 percent, only two-thirds of its pre-crisis, good-times growth rate. 

We’ll have to wait until the 2019 SCF to see if this trend has changed, with recent, positive wage data correlating with improving income and wealth growth for the majority of Americans and not just those at the top of the income distribution.  But even a return to pre-crisis growth trends won’t change the damage that’s already been done: 15 years of sitting in neutral for some, many going in reverse, and only the best-off among us in drive.  

* For the purposes of this post, income is defined as the Fed defines it in the SCF: the sum of a household’s wages, self-employment and business income, taxable and tax-exempt interest, dividends, realized capital gains, food stamps and other related support programs provided by the government, pensions and withdrawals from retirement accounts, Social Security, alimony and other support payments, and miscellaneous sources of income for all members of the primary economic unit in the household.  Wealth – used here interchangeably with net worth – also follows the Fed definition as contained in the SCF and is the difference between a family’s gross assets and their liabilities.  All dollar values are in 2016 dollars unless otherwise noted.