Department of Numbers

GDP compared to Household Income Aggregates

Posted Monday, May 19 2014

I'm gathering national and regional GDP data for a new section I'm working on to highlight local measures of economic activity, and I find that it automatically focuses one on the ways in which GDP is not the greatest way to represent local economic activity as experienced by the average resident of a region. The average resident's personal economy is probably pretty well captured by their income. Regional household economic growth might then be seen as the change in household income plus the change in the number of households. So what does aggregate household income growth look like compared to GDP growth then?

The chart below shows real US GDP growth since 2000 (blue) compared to total aggregate household income (green) and a statistic I made up which I'll call median aggregate income (red). If total aggregate household income can be thought of as average household income multiplied by the total number of households, median aggregate income is just median household income multiplied by the total number of households.

Measures of aggregate household income growth have not done nearly as well as GDP since 2000. They've grown, but not as fast the overall economy. The definition of GDI (a measure that should roughly equal GDP in theory) implies that business income has been growing more than household income. And this is indeed what we appear to be seeing, so increased profits to business accounts for at least some of the gap between aggregate income growth and GDP growth.

While the majority of households own at least some financial assets, which we might consider to be a flawed but rough proxy for exposure to business income, we can probably say that the average household does not derive a large fraction of their income from a share of ownership of a business in which they are not an employee. Analysing the distribution of that class of income is not trivial, however, so let's leave that investigation for another day. The point is that most people realize economic growth via growth in employment income which is the majority of their household income.

Looking at these measures decade by decade shows that growth was weak for all three in the aughts compared to the prior three decades. It also shows that household income aggregates used to grow more in line with the rate of GDP growth. Aggregate household economics fundamentally and uncharacteristically lagged this past decade.

The change in median household income and the total number of households over the last three decades tells us why things have been so tough since 2000. While the number of households grew, it grew less than it had in previous decades (and I even used a twelve year decade in this case!). Individual households have suffered as median incomes have fallen in real terms since 2000. The only thing that actually allowed aggregate household income to grow at all was the increase in the number of households.

As I dig further into the GDP numbers, my guess is that population flows (i.e. the change in the number of households) will explain a lot of the regional economic growth we've seen in the US recently. Since this data is for the US as a whole, imagine the geographic benefit to regions/states/cities that have had population growth since 2000 (e.g. Austin) as well as the loss to regions/states/cities (e.g. Detroit) that have had population declines since 2000. The US aggregates above likely mask a widely varying regional picture.