Income Ups & Downs

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American household incomes rise in good times and falls during recessions. And the most recent recession in 2001 was no exception. Median household income fell in both 2001 and 2002 and was unchanged in 2003, according to the latest Census Bureau report from its March 2004 household survey.

From 2000 to 2003 median household income dropped to $43,320, a decline of 3.4 percent. An average US household in 2003 had about $1,960 less in real spending money than they did in 2000. (All income comparisons between two time periods in this article are in constant inflation-adjusted dollars and rounded to the nearest ten dollars.)

But not all types of households follow the same pattern. Some demographic segments had rising income during the 2000 to 2003 period while others took a big hit. As some economists are forecasting another recession in 2005, we thought it might be useful to look at whose income keeps rising even in bad economic times. The idea being that, as in the downturn just past, some people will keep on spending no matter what the economy does.

Empty nesters, for example, did pretty well over the past three years while young people and young families are now living on significantly less. From 2000 to 2003 households headed by 55- to 64-year-olds saw their income increase 2.7 percent while median income dropped for every other ten-year age cohort.

The median income of married couples with children under 18 edged down 1.2 percent between 2000 and 2003, while the income of married couples without children moved up an insignificant 0.3 percent. Married couples without children include many retired couples whose income from savings has been hurt over the past several years by poor investment returns and low interest rates. Income of all 23 million households ages 65 or older (only 43 percent of which are married couples) dropped 3.5 percent to $23,790 between 2000 and 2003.

But households headed by people under age 35 had the most rapid income decline. The youngest households (those under age 25 who number only about 6.6 million households out of a total of 112 million) saw their median income drop 9.1 percent to about $27,050 in just three years. That means the average household in that age range now has about $4,900 a year, or $95 a week, less purchasing power than it did three years ago.

The next biggest loss was among households of 25- to 34-year-olds, where median income slid 5.5 percent to $44,780, an average household purchasing power loss of nearly $3,500. This is the age cohort that has the most new parents because half of all births are to women in this age range.

Declining real income among young adults can have negative long-term economic consequences because it often discourages family formation. The lack of sufficient income to pay the expenses of a child can result in fewer births and ultimately fewer productive workers to pay for rising retiree benefits.

One of the more interesting aspects of the income trend over the past three years is how it affected full-time versus part-time workers. The real median income of full-time, year-round working women (41.9 million) rose 5.2 percent to $30,720, while the income for similarly employed men (58.8 million) rose 2.0 percent to $40,670.

But when part-time workers are included the picture changes. The median income for all 80.5 million part- or full-time working men dropped 3.3 percent between 2000 and 2003 to $32,050, suggesting that the nearly 22 million men who worked at part-time jobs or worked only part of the year took a big cut in earnings. By contrast, the median income for all 71.4 million working women rose 1.4 percent to $22,000.

Between their 2000 and 2003 surveys the Census Bureau found a statistically insignificant increase of 375,000 in the number of full-time, year-round working men and women. But the Bureau found a 1.7 million increase in the number of men and women who worked at part-time jobs or who worked for only part of the year.

This would suggest that the decline in household income between 2000 and 2003 can be attributed in large part to a lack of growth in full-time jobs, partly to the replacement of full-time jobs by part-time ones, and to a limited extent to a decline in investment income.

The Census Bureau surveys from 2000 to 2003 found a fairly constant full-time, year-round working population of around 100 million men and women (two-thirds of all workers) whose real aggregate income increased by about $55 billion over that three year period. This may partly explain why consumer spending continued to grow over the past several years despite an overall decline in household income.

Economic downturns prior to 2000 seemed to have affected the income and spending patterns of a larger share of households, if only for psychological reasons. But this time the extraordinarily low interest rates, easier credit terms, government stimulus and uneven loss of income all combined to prop up consumer spending.

If an economic downturn does occur next year, or in the near future, we may again see the situation where enough households continue to increase their income that sales of consumer goods and services are unaffected. But there is also the possibility that with rising interest rates and a lack of other stimulus the impact on consumer spending could be much greater than in the past three years.

One mitigating factor is that the highest population and household growth in any age group is occurring among 55- to 64-year-olds. Households in that age category are increasing 4 to 5 percent per year. Since that was the only age group where income grew over the past three years, perhaps we can count on the Baby Boomers ages 45 to 54 who are aging into the 55 to 64 age cohort to continue spending as freely as they have in the past.

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