With Income Down and Cost of Living Up, Are We Headed for Disaster?
The Bureau of Economic Analysis, a subsidiary of the U.S. Department of Commerce announced earlier this month that American workers earned $505.5 billion less during January of this year than they did in December 2012 – a 3.6% decrease at a time when people are desperate for signs of encouragement related to the country’s laborious economic recovery. To make matters worse, the BEA also revealed that disposable income fell $491.4 billion, or 4.0%, while consumers spent $18.2 billion more.
The BEA’s snapshot would seem to indicate that our cost of living is on the rise, while income levels are falling, but how much can you read into data from a single month during turbulent economic times? If part of a larger trend, the January numbers would represent a significant cause for concern. But they could simply be aberration too.
“It’s similar to a couple of years ago, when the Toyotas and Lexus were crashing. People were asking, ‘Why are they crashing?’ Here’s just a car, and it accelerates and crashes, and we had to figure out for a while what was causing that. Think of the economy [the same way],” says Robert Duvic, a distinguished senior lecturer in the finance department at the University of Texas’ McCombs School of Business. “We’d want to see is there an underlying structural flow that really, really says what’s going on here, and I think that’s going to take time. Looking at what’s happened recently, there may be a trend, but I’d say it’s difficult for us to really say this is really what’s happening and that we can extrapolate this.”
One can glean a bit of insight into the seriousness of the issue by looking at numbers from past months as well as certain other economic indicators. Both personal income and disposable personal income – how much people make and how much of that they can actually spend, respectively – either held steady or increased during each the last four months of 2012. That’s a good sign. The fact that expenditures either rose or held pat during that time isn’t as encouraging, but at least it means that January’s numbers aren’t out of the ordinary in that regard.
The BEA did also note, upon releasing statistics for January, that the month-to-month decline in disposable personal income was at least in part due to “special factors, which boosted employee contributions for government social insurance in January and which had boosted wages and salaries and personal dividends in December.” That doesn’t necessarily mean increased costs are temporary, though. It could actually speak to a new norm.
Furthermore, you can’t ignore the fact that we seem to be repeating many of the same mistakes that helped push the country into a recession just a few years go. After retreating into our proverbial shells during the worst of the downturn – consumers actually paid off more than $1 billion in outstanding credit card debt during 2009 – we’ve added more than $82 billion to our credit tab during the past two years alone. U.S. consumers now collectively owe $833.8 billion to creditors, including nearly a quarter of a trillion dollars in debt so far past due that banks were legally required to write it off their books. This could either mean that rising expenditures are a byproduct of misplaced consumer optimism or it could reinforce the idea that our monthly paychecks can’t quite cover our obligations in an increasingly expensive society. In other words, do we merely need to alter our expectations or are there more serious, less controllable macroeconomic factors in play?
The way Duvic sees things, declining income levels are a result of businesses looking to keep costs low during uncertain times, while not everyone is actually experiencing an increased cost of living.
“Companies are trying to keep their costs down, and cost is what you pay people. With technology, with globalization and competition for services and goods here, we don’t see the cost [i.e. salaries] rising,” he told WalletHub in a recent interview. “The cost of living is going up because the rent prices are going up, but if you’re living in your house it’s not going up for you … I think the cost of living is going to vary for people. Older people need more medicine, more doctors; younger people, more food and entertainment and housing and stuff. So, I think it’s a mixed bag and you can’t just generalize.”
To Jeff Strohl, the director of research at the Georgetown University Center on Education and the Workforce, the notion that cost of living is on a consistent upward trajectory doesn’t hold much water. However, he also notes that in order to draw accurate conclusions from the overall income statistics, we must take a closer look at their makeup.
“What we end up having is a dual metrics system, which is that income is from multiple sources,” he said. “So, let’s just say my ability to consume isn’t income-dependent, it’s earnings-dependent. The income portion of my holdings includes income derived from stocks and bonds, etc. As the stock market has taken large hits, so has the income portion of the households, but my earnings haven’t been affected in that. Now that certainly wouldn’t drive increased consumption, so I’m trying to think what kind of consistent story we might have there on increased consumption. I actually don’t know, it’s an interesting question.”
Ultimately, what’s most apparent at this point is that there seems to be far more uncertainty than there are answers when it comes to the economic outlook. That makes sense, after all, considering how the interconnectedness of the world economy necessitates waiting for resolution to the banking turmoil in Cyprus as well as the impending elections in Germany amidst growing frustrations with the rest of the EU and the sequester here in the U.S.
We will therefore have to wait and see how the economy holds up over the next few months before we can truly gauge the seriousness of the simultaneous decline in income and rise in cost of living. If you're looking for clues in the meantime, Duvic recommends paying particular attention to what the government is doing.
“If we start seeing the government calm down and nibble and do some stuff, that’s a good sign," he said. "Because if we get out of this hyper-political stuff, which is sort of difficult, and we see the government start to function a bit better, I think that would be a big deal. I think that would give the market some confidence and give the economy some confidence here.”