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U.S. incomes are finally growing

·Senior Columnist

The missing piece from the economic recovery has finally materialized.

Median household income, adjusted for inflation, is now higher than it was before the recession that began at the end of 2007, according to new data published by Sentier Research. The typical family earned $57,153 in December, which is 4.3% higher than a year earlier and nearly 1% higher than December 2007. And month-to-month gains during the last several months have been the most rapid in the history of the survey, which dates to 2000. If the pace of growth continues in 2016, household incomes will hit a new record high well in advance of the November elections.

Despite widespread worries of another recession, data on jobs and income show that ordinary workers are increasingly better off. Famed billionaire businessman Warren Buffett said in his latest annual letter that “America’s economic magic remains alive and well." The numbers back him up.

Every month, Sentier calculates a household-income index, based on Census Bureau data, that allows it to measure the purchasing power of the typical family month-by-month, after adjusting for inflation. Here’s what the index looks like, with the red line representing household income (left scale) and the dark line representing the unemployment rate (right scale):

Source: Sentier Research
Source: Sentier Research

The chart captures a vital economic trend that helps explain the frustration of millions of Americans, and even the surprise rise of Republican presidential candidate Donald Trump. Total economic output—GDP—surpassed the pre-recession high all the way back in 2011. But median income remained depressed until just recently. That means the economy “recovered” but failed to bring a lot of workers with it.

Economists expect 2016 to be the best year for income growth in a long time. At 4.9%, the unemployment rate is the lowest since 2007. As labor becomes more scarce, incomes inevitably rise, since employers have to pay more to keep and find the workers they need. If the pace of growth from December is repeated when the January data becomes available, incomes will finally exceed the level from 2000.

That doesn’t mean all is well. One of the pernicious trends of the modern digital era is that more income is going to fewer people. So aggregate income can be going up, making the economy seem healthy, while the portion accruing to lower earners goes down—making many people feel worse off.

This is especially true at a time when employers value technical skills that are difficult to obtain, while the value of manual labor and even routine white-collar skills declines. “When innovation and the market system interact to produce efficiencies, many workers may be rendered unnecessary, their talents obsolete,” Buffett wrote in his annual letter. “Some can find decent employment elsewhere; for others, that is not an option.”

The portion of Americans feeling unnecessary or obsolete is a potent force bending the nation’s political establishment into new shapes. Donald Trump and Democrat Bernie Sanders both appeal to angry voters feeling disenfranchised by a changing economy that seems to have no place for them. Populist rhetoric decrying crony capitalism and a rigged system hit home with voters who don’t recognize the upward turn in the income chart above.

Finding solutions, however, is a lot trickier than complaining about the problem. All of the candidates think they have the answer—lower taxes, higher taxes, new types of stimulus, tougher rules on China. President Obama feels he has had a lot of solutions, too—and hardly any of them have gotten through Congress. With incomes finally recovering on their own, perhaps the next president should be cautious about fixing something that appears to be fixing itself.

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