By most measures, the U.S. economy is improving. Recent economic reports revealed two encouraging facts: The United States just experienced the best back-to-back quarters of growth since 2003 and fewer Americans are filing for unemployment benefits than at any time in the past 14 years.
Unfortunately, most Americans don’t seem to put much faith in the numbers, or as Gustave Flaubert famously remarked, “There is no truth. There is only perception.” Today, the perception of most Americans is very different than the optimistic view reflected in government statistics. According to the results of the BlackRock Global Investor Pulse Survey, only about one in four Americans believe that the U.S. economy and job market are getting better. Worse still, a full 75% of Americans believe that it is hard to keep up with bills and save for retirement. So, how do you explain the disconnect between an economy that appears to be shaking off its lethargy and the perception that the United States never fully recovered from the financial crisis?
On the surface, it is hard to reconcile strong numbers with consumer caution, particularly the despondency over jobs. While the economy is still a long way from the halcyon days of the late 1990s, over the past six months the United States has created an average of 245,000 net new jobs per month, the fastest pace since the spring of 2006. What is missing from the recovery? The simple answer is income growth.
While the economy is growing faster and more jobs are being created, with the exception of a relatively small subset of highly skilled workers, wage growth is not accelerating in any meaningful way. Although overall compensation, including benefits, ticked up in the last two quarters, wage growth remains sluggish. Hourly wages have been stuck at around 2% year-over-year despite faster job growth. Looking at broader measures of income growth, disposable income is up around 4.4% from a year earlier. This is a welcome improvement from last year’s levels, but it is still about a third below the long-term average.
The lack of real, or inflation adjusted, income growth explains why most Americans are not feeling better about the economy or their own prospects. Historically, income growth has been highly correlated with confidence. Higher levels of real income growth are associated with optimism, while stagnant income growth tends to be associated with lower levels of confidence (see below chart).