Levy Economics: 90% Of Americans Worse Off Today Than In 1970s

by Gary D. Halbert

May 3, 2016

90% Of Americans Are Americans Worse Off Than In 1970s


1. US Economy Grows by Weakest Pace in Two Years

2. 90% of Americans Worse Off Today Than in 1970s

3. 24% of Voters May Not Vote For Trump or Clinton

Americans Worse Off – Overview

Today we will focus on a recent study from the Levy Economics Institute which found that 90% of Americans were worse off financially in 2015 than at any time since the early 1970s. Furthermore, for the vast majority of Americans, the nation’s economy is in a prolonged period of stagnation, worse even than that of Japan.

So are we really worse off today than Japan? This latest study concludes that the answer isYES, when it comes to real income – that is, income adjusted for inflation. According to their findings, 90% of Americans earn roughly the same real income today as the average American earned back in the early 1970s. It’s an eye-opening look at how the vast majority of Americans are struggling to make ends meet.

Before we get to that discussion, let’s take a look at last Thursday’s disappointing report on 1Q Gross Domestic Product. We will round-out today’s E-Letter with some interesting polling data from Rasmussen, which suggests that up to 24% of American voters may not vote for Donald Trump or Hillary Clinton and may just stay home on Election Day if they are the nominees. Wow!

Americans Worse Off – US Economy Grows by Weakest Pace in Two Years

Last Thursday’s initial 1Q GDP report came in below expectations and deserves some additional analysis. The US economy expanded in the 1Q at the slowest pace in two years as American consumers reined-in spending and companies tightened their belts in response to weak global financial conditions and the plunge in oil prices.

1Q Gross Domestic Product rose at a 0.5% annualized rate after a 1.4% 4Q advance, the Commerce Department reported. The increase was well below the 0.9% pre-report consensus and marked the third straight disappointing start to a new year. This advance report will be revised two more times at the end of May and June.

Americans Worse Off Real GDP
Americans Worse Off

As you can see above, US GDP has been trending lower each quarter since the 2Q of 2015. Weaker global economies and oil’s tumble resulted in the biggest business-investment slump in almost seven years in the 1Q, and household purchases climbed the least since early 2015, the GDP data showed.

While Federal Reserve officials acknowledged the 1Q softness in their policy statement last Wednesday, they also suggested that strong hiring and recent tepid income gains have the potential to reignite consumer spending and propel economic growth stronger later this year… but they almost always point to something positive.

The fact that personal consumption growth slowed in the 1Q is a disappointment, especially in light of much lower gasoline and energy prices from a year ago. Household purchases, which account for almost 70% of the economy, rose at a 1.9% annual pace last quarter, compared with 2.4% in the final three months of last year.

Consumer spending, while slightly better than the 1.7% median forecast, was a disappointment in light of the consumer-friendly fundamentals including low gasoline prices, cheap borrowing costs, increased hiring and warmer-than-usual winter weather.

Thursday’s GDP report showed disposable income adjusted for inflation climbed 2.9% in the 1Q, an improvement from the 2.3% gain in the final three months of 2015. The savings rate ticked up to 5.2% in the 1Q from 5.0% in the 4Q of last year. Government spending rose at a1.2% pace, led by states and municipalities. That’s about it for the good news.

The biggest negative factor weighing on the economy last quarter came from companies. Nonresidential fixed investment, or spending on equipment, structures and intellectual property, dropped at a 5.9% annualized pace, the biggest decline since the 2Q of 2009. This was much worse than expected.

investment is also languishing as corporations struggle to boost profits against a backdrop of weak overseas demand and restrained domestic purchases. Consumers in the US scaled back purchases, and companies continued to trim inventories to bring them more in line with sales.

Inventories subtracted 0.33% from GDP growth after a 0.22 percentage-point drag in the 4Q of 2015. Progress in trimming inventories, along with receding headwinds from abroad and the latest comeback in the prices of oil and other commodities, may keep investment from deteriorating further. Weaker demand from overseas customers led to a drop in exports in the 1Q. Trade subtracted 0.34% from GDP growth, the most in a year.

Stripping out unsold goods and trade, the two most volatile components of GDP, as well as government expenditures, so-called final sales to private domestic purchasers increased at a1.2% rate, the weakest advance since the third quarter of 2012.

Several forecasters suggested that the 1Q will be the worst quarter for consumption and the economy for all of 2016, as has been the case the last couple of years. In 2015, GDP rose 0.6% in the 1Q before rebounding to a 3.9% pace in the 2Q. In 2014, the economy shrank at a 0.9% rate in the 1Q and jumped by a 4.6% rate in the April-June period.

Remember, the weak starts in 2014 and 2015 were attributed to severe winter weather, which was not the case this year when we had a very mild winter in most parts of the country. So it remains to be seen if we will see a similar rebound just ahead.

Now let’s get on to our main topic for today.

90% of Americans Worse Off Today Than in 1970s

A recent study in March from the Levy Economics Institute found that 90% of Americans were worse off financially in 2015 than at any time since the early 1970s. Furthermore, for the vast majority of Americans, the nation’s economy is in a prolonged stagnation, far worse than that of Japan. Worse than Japan?

When we think of the Japanese economy, we think of the Lost Decades.” Japan’s economy was the envy of the world in the 1980s, but starting in 1991, it fell into a prolonged recession and deflation which lasted from then to 2010. Japan’s GDP fell from $5.33 trillion to $4.36 trillion during that period, which saw wages fall by apprx. 5%.

So are we really worse off today than Japan? The Levy Economics Institute at Bard College thinks the answer is YES, when it

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