Our economy is driven by consumption, therefore household income is a significant figure in the analysis of its health. Using the real median household income in the US, we can get an idea whether the average consumer is in a position to consume goods and services. As is visually obvious, real income tends to peak before recessions, since the early 1980’s.
If most people aren’t buying goods and services, companies probably aren’t making money. If companies aren’t making money, they cannot hire workers. If people aren’t working, there is no longer a consumer. Right now, it looks as though the average household is doing well in terms of income.
Another aspect of spending comes from borrowed money. It is important to look at the amount of money households borrow to finance their lifestyle. According to the NY Fed, Household Debt hit a new all time high at over $12 Trillion.
When housing related debt, which has been propped up in this low interest rate environment, is removed we are left with a more clear picture as the asset inflation in houses is removed.
At over $3.5 Trillion, Non-Housing Debt is pushing the economy forward. Lead by a surge in student-loan debt, this could unfortunately come back to bite us as younger generations may find it harder and less appealing to add to their debt with additional housing-related spending. Auto loans are another sector to keep in mind as terms are getting easier with longer loan periods and more vehicles coming off lease.
In all, even though debt is rising, so are incomes. This is generally a good sign for a healthy economy. What’s more, incomes have not risen as much as expected while unemployment is so low- this should, in theory, boost incomes more.
Source: FRED, St. Louis Fed, NY Fed