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Middle-class families are finally earning more

An important measure of household income rose in December by the largest amount in nearly 8 years, signaling a long-overdue rebound in family earning power.

Data from Sentier Research show that median household income in December rose 3.3% from the year before, the strongest year-over-year reading since October, 2006. Since those numbers are adjusted for inflation, they suggest the typical family is finally starting to get ahead, after a brutal recession and halting recovery. “We’re still not back to where we were, but incomes are coming back,” says Gordon Green of Sentier. “It’s a healthy sign.”

Stagnant incomes have been the biggest shortcoming in a recovery that still doesn’t feel like it to many people. Jobs have returned, with employers creating nearly 3 million new openings in 2014. But many new jobs pay less than those lost during the recession, which ran from 2007 to 2009. And wages for people who have jobs have been rising by less than 2% per year, which is roughly even with inflation.

Median household income remains in a long-term rut, as this chart shows. (The red line represents income, while the black line represents the unemployment rate):

Sources: For income data: Sentier Research, LLC estimates of annual household income derived from the monthly Current Population Survey (CPS) conducted by the U.S. Census Bureau; for the unemployment rate and the CPI-U: the U.S. Bureau of Labor Statistics.
Sources: For income data: Sentier Research, LLC estimates of annual household income derived from the monthly Current Population Survey (CPS) conducted by the U.S. Census Bureau; for the unemployment rate and the CPI-U: the U.S. Bureau of Labor Statistics.

December’s median income, $54,417, is still 3.2% lower than the level at the end of 2007, when the recession began. And it’s 4.4% lower than it was in January 2000, which reveals a pernicious problem: Incomes were stagnant well before the recession even began, which is why many middle-class families feel relentless financial stress. The recession merely deepened a hole many people were already in.

Still, incomes have been on a slow rebound since 2011, and the improvement seems to be picking up steam. Part of the reason is the sharp drop in energy prices during the last few months. Since the Sentier numbers are adjusted for inflation, purchasing power rises as prices fall. Inflation during the last two months has actually been negative on a month-to-month basis on account of sharply falling oil and gasoline prices. That pushes up the value of today’s income relative to the earlier figures it’s measured against. To some extent that’s a numerical quirk, but it represents buying power and Green says it only accounts for about one-third of the handsome December increase, anyway.

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Sentier derives its numbers from government figures that include many types of income, including transfer payments, unemployment compensation and some types of investment income, in addition to wages earned from work. Wages alone have been rising at a lower rate, which worries economists since regular pay is barely keeping up with inflation. But there are signs that, too, may soon improve.

The latest quarterly survey from the National Association of Business Economists found that 51% of economists surveyed said their firms plan to raise wages in the coming year. Last fall, only 34% said wage hikes were coming. With companies going on a hiring binge in 2014 and the unemployment rate falling steadily, many economists have been saying that wage hikes are inevitable as employers have to pay more to get and keep the high-quality workers they need.

That long-awaited trend hasn’t shown up yet in the numbers published by the Labor Deptartment as part of the monthly employment report. But lots of other data strongly hint we’ll see meaningful wage gains within the next few months. When that happens, we can call it a recovery, for real.

Rick Newman’s latest book is Liberty for All: A Manifesto for Reclaiming Financial and Political Freedom. Follow him on Twitter: @rickjnewman.

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