Category Archives: Econ Data

Why Voters Are Upset: The Underperformance of the US Economy Since the 2008 Crash

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A clear message from the November 5 election is that voters are upset with their economic circumstances.  Much of the focus has, not surprisingly, been on the comparison households feel relative to 2020, when Trump was president.  But 2020 was a special year.  While the economy collapsed with the lockdowns, massive federal relief programs (first proposed by Nancy Pelosi and the Democrats in Congress, and later welcomed and signed into law by Trump) sustained and indeed added to household disposable income levels.  With expenditures restrained due to the Covid pandemic, household savings and bank account balances rose.  They were then spent down in the following years.  A post on this blog from December 2022 estimated the excess savings balances would likely be used up by 2024 – the election year – at which time households would be in a bind.  And that appears to be precisely what happened.  An analysis by JPMorganChase of the bank accounts of 7.8 million of its customers found that bank balances – which had risen to more than 60% above normal levels in 2020-21 – had by 2024 fallen to below what would have been expected based on historical patterns.

But the economy has not been doing well for some time.  Using up and then going beyond what had been saved in 2020-21 needs to be explained by more than households making use of those excess balances.  Rather, households have grown increasingly anxious about not being able to sustain a standard of living that they had expected they would be able to enjoy.  That anxiety needs to be examined in a longer-term context.

The chart at the top of this post suggests what might be underlying this.  Both per capita real GDP and per capita real Personal Consumption Expenditures (PCE) grew at a remarkably steady pace from 1950 for per capita real GDP and back even further to around 1936 for per capita real PCE.  Note that the chart is shown with the vertical scale in logs, and hence a constant rate of growth will be a straight line.  The trend lines shown (in black) are then drawn so that they go roughly from peak to peak, although with a small excess sometimes allowed.

Growth in per capita GDP and PCE were both remarkably close to those trends – up until 2008, that is.  Both GDP and PCE then fell in the economic and financial collapse in that last year of the Bush administration, with this continuing into 2009.  They then stabilized and began to grow again.  But unlike in prior downturns stretching back to 1936, the economy did not return to its previous path.  Rather, it remained below.  A gap opened up and has remained.  Indeed, the gap has grown.

This can be seen more clearly in the same chart but for the period of 2000 to 2023 only:

The trend lines are the same as drawn before.  By 2023, real GDP (in 2017 prices) was $67,600 per person, but would have been $81,300 per person had the economy continued on the previous trend path.  Real Personal Consumption Expenditures per person was $46,600 in 2023, but would have been $55,700 had it kept on the previous path.  These differences are not small.  Personal consumption would have been more than $9,000 higher per person (in 2017 prices), or more than $36,000 higher for a family of four.  In terms of 2023 prices, personal consumption would have been close to $11,000 higher per person, or $44,000 higher for a family of four.  Economic growth matters, it compounds over time, and when it slows, the impacts can soon be huge.

The figures can also be presented in percentage terms, where the following chart shows the ratio of per capita real GDP and real PCE on the trend compared to what they actually were in each year:

There were relatively modest fluctuations around the trend as drawn up until 2008.  But then one sees a bulge – far larger than anything seen before – that has been sustained and shows no sign of returning to the trend path.  By 2023, both per capita GDP and per capita Personal Consumption Expenditures would have been 20% higher had the economy remained on (or had returned to) the previous trends going back to 1950 for per capita GDP and 1936 for per capita PCE.  That is a huge difference.

It is also worth noting that not only has the economy not returned to the previous trend path, but – while still early, with a limited number of years – the growth rate of per capita real GDP has slowed.  On the prior trend path from 1950, per capita real GDP grew at an annual rate of 2.15%.  GDP then fell in 2008/2009 before stabilizing under Obama and then starting to grow.  From the start of Obama’s second term (2013) through to 2023, per capita real GDP grew at an annual rate of 1.87% (with similar rates under Obama, Biden, and Trump if one excludes the collapse in Trump’s fourth year in office).  That is, growth in real GDP has slowed by about 0.3% per annum, and hence one sees in the chart above that real GDP on the trend path was about 17% above the actual in 2013 and is now 20% above the actual.

Growth in per capita real Personal Consumption Expenditures, in contrast, has not slowed as much.  On the trend path it grew at a rate of 2.3% per year, while from 2013 to 2023 it grew at almost the same rate of 2.2% per year.  That is, households have sought to sustain their previous growth in consumption expenditures.  But with GDP (and hence incomes) not growing as fast, this has become increasingly difficult.

Finally, it should be noted that these figures on per capita GDP and per capita PCE are averages, and do not take into account distributional changes.  But as was shown in previous posts on this blog, the distribution of incomes became dramatically worse since about 1980 – when Reagan was elected – while wages have stagnated.  Richer households have been doing better, and hence relative to the averages, poorer households have been doing worse.

Voters therefore have good reason to be upset.  The economy never fully recovered from the 2008 collapse, and while growth resumed, the rate of growth has been somewhat less than what the country had before.  Households have tried to sustain the previous growth in personal consumption, but that has become increasingly difficult in the face of a slower pace of GDP growth.

The critical question is, of course, why did the economy never recover in full from the 2008 collapse.  I hope to address that in a future blog post.  The purpose of this one has been simply to present that there is an issue.  Note also that there may be multiple reasons for the lack of a full recovery.  The underlying factors can be additive, and together account for an economic performance that falls short of what had previously been expected.

A Short Update on the CPI

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This post is just a short update on the CPI, as a follow-up to a post last month.  The Bureau of Labor Statistics issued today its regular monthly update on the CPI, with figures through September.  As discussed in earlier posts on this blog, I find the six-month moving average for the change in the CPI (annualized) as the most interesting presentation of the data as it picks up changes in the trends well while not being subject to the volatility of changes over shorter periods.

For the six-month period ending in September, the annualized rate of change in the overall CPI is now just 1.6% – or well less than the 2% target many often refer to.  The CPI for everything-but-shelter is now growing at an essentially zero rate (0.1% to be more precise).  And the rate of change in the shelter component of the CPI continues to fall, growing at an annual rate of 4.2% over the past six months – the lowest since the six months ending in July 2021 (when the country began to emerge from the Covid crisis).  This is close to what it has been in the past decade, other than in 2020 when the price index for shelter collapsed (along with much else) due to the Covid crisis, and then the rise from 2021 to recently.  Between 2014 and 2019, the shelter component of the CPI consistently rose at a rate of between 3 and 4% (annualized).

The inflation rate has definitely come down to a level that can be considered normal.

Real Wages of Individuals Under Obama, Trump, and Biden

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There have been repeated assertions by Trump during the presidential campaign (as well as by Vance in the October 1 debate between the vice presidential candidates) that people’s wages were higher under Trump than they now are under Biden.  What has in fact happened?

The chart above shows how indices of the real wages of individuals have moved during the last two years of Obama’s presidency, the four years of Trump’s presidency, and Biden’s presidency through to August 2024 (the most recent data available as I write this).  There is much to note, but first a few words on the methodology.

The primary data comes from the “Wage Growth Tracker” website provided by staff at the Atlanta Fed.  It makes use of data generated as part of the Current Population Survey (CPS) of the Bureau of Labor Statistics.  From the way the survey is designed, they can obtain data on the wages earned by each household member at a point in time and again for that same individuals twelve months later.  From this raw data, staff at the Atlanta Fed calculate for the individuals in the matched households how much their wages changed over those twelve months.  Since the CPS also collects information on the individuals themselves, they can also then determine what the average (as well as median) changes in wages were for individuals grouped by various characteristics, such as age or gender, race, education, occupation, and more.  The chart above shows both how real wages changed for workers as a whole, as well as the changes with wage-earners grouped by quartile of wage income, from the lowest to the highest.  The figures shown here are for the medians in each category.

The Atlanta Fed wage data goes back to December 1997, is presented in terms of the 12-month percentage changes, and is in nominal terms.  I converted the data to real terms based on the change over the same 12-month periods in the overall CPI (formally the CPI-U, produced by the BLS), converted this to an index number, and then rebased this to set January 2021 equal to 100.  The result is the chart at the top of this post.

In interpreting these figures, it is critically important to recognize that they reflect what households actually experience in terms of the changes in their individual wages.  This differs from what one will normally see when reference is made to changes in mean (i.e. average) or median wages.  The figures in the chart track the experience of individuals, and individuals will normally see their wages start relatively low – when they are young and inexperienced – and then grow over time as they gain skill and experience.  That is the normal life cycle.

Statistics on wages as normally presented, in contrast, measure not what the experience is of individuals, but rather movement in the overall mean or median wages of all those in the labor force at the time.  Changes in such wages will normally be less than what one observes for individual wages, as the labor force is dynamic, with young people entering (at normally relatively low wages) while older people retire and leave the labor force (at normally relatively high wages).  This will reduce the measured growth in average wages as higher-wage workers have left while lower-wage workers have entered.  While this change in the average wage of all those employed at each point in time is a useful statistic to know, it does not reflect the lived experience of individuals, who normally see their wages grow over time (at least in nominal terms) as they gain experience and hence ability.

One sees a consequence of this in the chart above.  Those in the lowest quartile of the distribution of wage earnings have seen growth in the wages they earn as individuals that is greater than the percentage increases of those in the higher quartiles.  This is because those starting out in the labor force – and entering at relatively low wages – generally see a relatively fast rate of wage growth as they gain skills and are promoted.  This slows down over time, with older workers still receiving annual wage increases (in at least nominal terms) but not as large in percentage terms as young workers do.

Tracking the real wages of individuals is therefore of interest, but cannot then be used to track over long periods of time what has happened to average (or median) wages.  But for periods of several years, as well as for a comparison of growth in some early period to growth in a similar later period, tracking as in the chart above is of greater interest than what has happened to average or median wages of an always changing labor force with young workers entering and older workers leaving.  It is useful in comparisons of the growth in wages between presidential terms.

With this understanding, a number of points may be noted on individual wage growth in recent years:

a)  Individual wages in real terms were rising at a reasonable rate in the last few years of the Obama administration.  They then grew at a similar rate (not a faster rate) during the first three years of the Trump administration prior to the disruptions due to Covid.  In fact, the growth rate of overall individual wages (as measured at the medians) was 1.4% per annum in real terms during the final two years of the Obama administration (January 2015 to January 2017), and then the exact same 1.4% per annum in real terms during the first three years of the Trump administration (January 2017 to January 2020).

Trump has repeatedly claimed that wage growth (as well as many other things) were the highest ever during his administration, but that is not the case.  The most that Trump can rightfully claim is that he did not mess up the growth path that Obama had put the economy on following his reversal of the economic and financial collapse that began in 2008, in the last year of the Bush administration.

b)  With the onset of the Covid crisis in early 2020, individual real wages in fact rose despite the chaos of the lockdowns.  This might appear perverse, but in fact makes sense.  First of all, the rate of unemployment shot up to 14.8% – the highest it has been since the Great Depression (so Trump now owns this record).  But 85.2% remained employed, and were employed under often difficult personal circumstances given the easy spread of Covid and a lack of preparation by the Trump administration for the approaching pandemic.  (Trump instead repeatedly stated that all would be fine; that the virus would quickly disappear; and that banning flights from China had been a great success in stopping the virus.)

Those who remained in their jobs during this difficult period were often compensated well for their willingness to do so.  They received significant increases in their wages and/or bonuses.  The alternative of unemployment was also not as bad as it normally would be.  Aside from the safety aspect of protecting yourself from exposure to Covid, programs for the unemployed at the time were more generous and more easily available than they normally are, due to special legislation passed to address the exceptional circumstances of Covid.  Workers had this alternative, and firms had to respond.  Firms also received often generous support through various special programs during this period, that enabled them to pay higher wages to the employees who remained on the job.

Thus one sees in the chart above that individual real wages in fact rose in 2020, despite of (or perhaps one should say because of) the Covid disruptions.

c)  The Covid disruptions continued into 2021 and the first half of 2022, while the special support programs for firms and the unemployed were scaled back to normal.  But supply chains had been radically disrupted globally due to the crisis, did not start to recover until vaccines became widely available, and then required time to catch up and normalize.  And while supply was constrained, demand rose more quickly starting in 2021 as shoppers returned.  This demand was especially high both because of pent-up needs or desires for items not purchased in 2020 due to the lockdowns as well as caution due to the easy spread of the disease, while personal savings were exceptionally high and could now be spent.  Savings (and bank accounts) were high due both to the lack of spending in 2020 and to the extremely generous financial support packages passed under both Trump and Biden.

Global supply chains then worked themselves out by mid-2022.  The rate of inflation had been relatively high before then due to the high demand confronting limited supply, but inflation as measured by the CPI index for all items other than shelter then fell dramatically from July 2022 once supply was no longer constraining.

This inflation was then reflected in the decline in real wages from early 2021 to the trough in June 2022, as seen in the chart above.  From January 2021 to June 2022 the overall individual real wage fell at a rate of 3.5% per annum.  But probably a more appropriate measure would be for the period from January 2020 (immediately before the Covid crisis) to June 2022.  Over this period, the overall individual real wage fell at a rate of 1.2% per annum.

d)  Once Covid and its related impacts were largely over in mid-2022, real wages immediately began to grow again.  And indeed, they have grown since then (through at least to August 2024 – the most recent data available as I write this) at a rate of 2.5% per annum.  This is substantially faster than the pace they had grown under Trump (as well as under Obama before him), although this can be attributed in part to a recovery from the decline in the period ending in June 2022.

With this recovery, the overall individual real wage is now back on average to where it was in January 2021.  And the real wages of those in the lowest quartile and in the second quartile of the wage income distribution are now significantly higher than they have ever been.  But the levels as of August 2024 should not be seen as especially significant in themselves.  August is simply the most recent data available.  Rather, what is significant is the strong growth seen in real wages since June 2022, with no sign yet that that strong growth is abating.  Eventually that growth will likely return to the longer-term growth seen under Obama and then in the first three years of Trump, but it is not there yet.

e)  One should also note that all these figures are for the medians over a diverse population.  While the overall figures (whether measured at the means or the medians) have gone up and down, the actual real wages of any given individual can be quite different.  While the median individual real wage is now back to where it was in January 2021, this will not be true for everyone.  That diversity in experience needs to be recognized and acknowledged.

 

Biden inherited an economy that had suffered the sharpest downturn and highest unemployment since the Great Depression.  Managing the onset of the Covid pandemic in 2020 would have been difficult for even the most competent of administrations, but the Trump administration was far from the most competent.  The impacts of that crisis – on supply chains among other effects – continued into 2021 and the first half of 2022, and they led to falling real wages over this period.  But as supply chains normalized, real wages began to recover.  As of August 2024, overall individual real wages are back to where they were in January 2021.  But more importantly, those real wages have been growing at a rapid pace since mid-2022 and as yet show no sign of slowing down.