Investment Matters

Lessons from US income and poverty data

This week I was taken by an article in the NY Times stating “U.S Household Income Grew 5.2 Percent in 2015, Breaking Pattern of Stagnation”.  The article picked up on data released by the US Census Bureau on Tuesday, which showed the largest single year increase in household income on record (since 1967).  It also showed the share of Americans living in poverty had the sharpest decline in decades. 

US Poverty 2

Source: US Census Bureau

It struck me that this data was notable on several fronts, and serves as a good economic lesson to us all. 

Whilst a record rise in household income would be notable at any time, it is particularly pertinent given the backdrop of a heated US presidential race - where the tone is being set by a belief that the economic system is busted, and a dark assessment of the US’s health is being espoused (particularly from one side of the debate).  Whilst it remains the case that the median household income is still 1.6% below the pre GFC level, this record growth (or catch up) shows that the US recovery is beginning to filter down to the average American household.  Perhaps the extreme bearishness and pessimism over “the system” is being overplayed. 

Secondly, it is notable because I am sure that if you had of asked anybody to forecast the result they would almost certainly have been wrong.  Professional or amateur, I am sure the consensus would have been for weak (at best) income growth. 

Just like prior to the GFC (where at the start of 2007 most would have said economic growth would continue strongly into 2008), it serves to show that most people’s best guess (and the consensus) tends to be what they have seen in the immediate to short term past. 

Today almost universal consensus is for a weak growth outlook, with significant downside potential. 

This surprising US data serves as a timely reminder that no one actually knows (or can reliable and consistently forecast) what the future holds.  More things can happen in the future than we can possible imagine.  Furthermore, they can happen when you least expect them - like a record increase in US household income in 2016!

For investors, it serves as a reminder that extreme positions can be dangerous (all out or all in) as the short term future is always uncertain.  What is certain, however, is that over time economic development will continue to occur (sometimes in fits and starts, and probably always slower than most would like), and that it will ultimately lead to higher average wealth. 

Whilst factually the markets are at high valuations today, and this undeniably presents a risk, we know for sure that economic development (and higher earnings) will in time sort out the problem (by making the asset prices look more reasonable versus income levels). 

As a result we continue to believe a tailored version of investor Howard Marks' mantra – “proceed, but with significant caution” - remains the best investment advice available today.  Who knows what will really happen next?