Commentary: How Prosperous Are We?
By Michael J. Mandel
Every era has its economic strengths. Big wage gains enjoyed by workers were the hallmark of the 1960s. The second half of the 1970s was marked by soaring values of residential real estate. And the middle of the 1980s was a great time to be a stock market investor.
But taking everything together, the last five years has been almost a Golden Age for U.S. households. Wages, real estate, and stocks--the three main components of household prosperity--are all up sharply since 1996. Real wage and salary income per worker is up a strong 16%. The median sale price of existing single-family homes, adjusted for inflation, has increased by 18%, one of the biggest gains on record. And the value of stocks held by households, even after the meltdown, is up 41% since the end of 1996.
In many ways, this five-year stretch outdoes even the '60s, generally held up as the paragon of good times. To get a clearer picture, BusinessWeek has created an index of household prosperity, which is a weighted combination of real wage income per worker and real net worth per household. Net worth includes assets such as stocks and bonds, 401(k) holdings, and real estate, reduced by mortgage and other types of debt. Such an index, combining both wage income and wealth, is particularly relevant today, since 68% of American households own their homes, and many have investments in the stock market.
Measured by this index, household prosperity has risen by 20% over the last five years. That exceeds the 16% gain in the best five-year stretch of the 1960s. Perhaps more impressive, the index shows that households gave back few of their gains in 2000 and 2001, despite the stock market downturn, recession, and the September 11 terrorist attacks. Rising wages and strong real estate values compensated for the sharp decline in the equity markets.
Indeed, the household prosperity index was likely up by 0.9% in the first quarter. While home prices rose nationally, the latest government data show that real wage and salary income per worker rose at an almost 4% annual clip in the first two months of 2002, and unemployment only crept up a bit. Meanwhile, the broad stock market, measured by the Wilshire 5000 index, was slightly up in the first quarter, so a declining market was no longer pulling down the prosperity index. Such gains help explain why consumer confidence and spending remain so strong today. One of the great strengths of the U.S. economy is that it is broad and diverse enough to absorb big shocks, and still keep going.
What's more, the prospects for rising household prosperity for the second half of the year look better than they did just a couple of weeks ago. For example, one big fear had been that the Federal Reserve was going to have to aggressively raise interest rates over the next few months to fight inflation. Such hikes would clearly be bad news for the housing market. Higher rates would also hit hard at corporate profits and the stock market. Household spending is potentially vulnerable to rate hikes as well, since debt service already amounts to 14.3% of disposable income.
But it looks much less likely that big rate hikes are coming anytime soon. The latest consumer inflation report, released on Apr. 16, showed core inflation in the first quarter rising at only a 2.1% rate, down from 2.6% the previous quarter. The low inflation means the Fed doesn't have to have a fast trigger finger. As Fed Chairman Alan Greenspan told the Joint Economic Committee on Apr. 17, "the Federal Reserve should have ample opportunity to adjust policy to keep inflation pressures contained once sustained, solid, economic expansion is in view."
The other piece of good news for household prosperity is that productivity growth has stayed surprisingly strong. If corporations can boost productivity, that expands the nation's economic output more rapidly, making it possible to get good wage gains, higher profits and stock prices, and increased real estate values simultaneously. Conversely, weak productivity growth hurts corporate profits and holds down wages. Indeed, the last time the prosperity index fell for an extended period was from 1973 to the early 1980s, when productivity growth slowed to a crawl.
But rather than a productivity slowdown, the U.S. seems to be experiencing a productivity acceleration. Productivity rose at a 5% pace in the fourth quarter, and the first-quarter productivity figure, to be released on May 7, could be as high as 4%.
True, companies are not yet ready to ramp up their spending on productivity-enhancing equipment. Despite a small bounce upward, new orders for nondefense capital equipment, adjusted for inflation, are still 25% below their end-of-2000 levels.
But production in the information technology sector is up for three straight months, the first time that has happened since before the recession started. And Intel Corp. reported an increase in sales in the first quarter, for the first time in since 2000.
Moreover, companies are showing an ability to boost productivity by better using information-technology gear they put in place during the boom years. That's problematic for skeptics, who believe that much of the capital spending during the 1990s boom was excessive. But economic historians, such as Paul David of Stanford University, have long argued that it takes time for companies to learn how to use new technology.
The biggest danger now comes from abroad. While energy prices don't pose much of a threat now, a full-scale war in the Mideast could send prices soaring and pull down real incomes. "All economic downturns in the United States since 1973," warned Greenspan, "have been preceded by sharp increases in the price of oil."
No one can predict wars or terrorist actions. Yet at least for now, household prosperity seems to be resting on a solid foundation.
Mandel writes about the economy from New York.