Telescoping Median Household Income Back in Time

According to Sentier Research, median household income in the United States increased to $63,220 in October 2018, a 0.3% increase over the firm’s estimate of $63,007 for September 2018. The following chart shows the nominal (red) and inflation-adjusted (blue) trends for median household income in the United States from January 2000 through October 2018. The inflation-adjusted figures are presented in terms of constant October 2018 U.S. dollars.

The single biggest takeaway from this chart is the growth streak that median household income has achieved during 2018. Since nominal median household income last saw a downtick in December 2017, in both nominal and inflation-adjusted terms, the income earned by the typical American household at the middle of the distribution of income in the United States has now set new record high values in each of the last ten months.

At the same time, the year-over-year growth rate of median household income in the United States has started setting record high values as well, in nominal if not inflation-adjusted terms. The next chart shows this data from January 2001 through October 2018.

At a year-over-year growth rate of 6.3%, October 2018 has recorded the fastest year-over-year growth for nominal median household income over Sentier Research’s entire data series, which only extends back to January 2000 for their signature monthly household income data.

Analyst’s Notes

Don’t you hate running into a limit like that? What if we could telescope the estimates for monthly median household income to go further back in time?

That’s something that only we can do, where we simply need to apply the alternative method we developed for estimating monthly median household income in the U.S. that we developed to fill the gap for this data when Sentier Research suspended their income data reporting in the months between May 2017 and March 2018.

The following chart illustrates the model we can use to estimate median household income in the era before Sentier Research’s coverage begins, where the relationship provided by the data from January 2000 through March 2015 (shown in orange), is what we would test out with the monthly data that precedes Sentier Research’s estimates.

But there’s a problem. We don’t have any monthly median household income estimates before January 2000 to check our results against to assess the accuracy of our estimates. Instead, we will have to rely upon the annual estimates of median household income that the U.S. Census Bureau has been reporting since 1967.

In using that data, we would expect to have a larger error in our estimates than we have had with Sentier Research’s monthly estimates, simply because we’re estimating income at intermediate points of time from when the Census Bureau samples its annual data. But we reasoned that so long as we can produce estimates using our alternate method that fit within the error range our estiamtes have with the annual data over the period where we can cross-check it with Sentier Research’s estimates, we should be able to produce reasonably accurate results.

So that’s what we did. We found the results for our alternate method, which is based on actual data from January 2000 through March 2015, can reliably estimate monthly median household income all the way back to January 1986.

We didn’t have to stop there, except that we found that the differences between our modeled results and the U.S. Census Bureau’s annual median household income estimates grew unacceptably large in the period preceding January 1986.

We later identified the reason why. The survey that the U.S. Census Bureau used to collect income data from American households underwent a significant revision that was implemented in March 1987, where the data reported for the 1986 calendar year was both the first to be based entirely on households selected from the 1980 Census-based sample design rather than the 1970 Census-based sample, and also a larger number of smaller sampling areas. The March 1987 survey was also the first to collect a more detailed level of household income data for higher income earning households, but that impact would be relatively minor compared to the other changes in the survey’s methodology.

As we saw with the effects on reported median household income following the March 2015 revision to the U.S. Census Bureau’s income survey, the Census Bureau’s estimates for the period preceding 1986 are very different from what came after – the accuracy of the model we developed based on the available monthly data we have from January 2000 through March 2015 breaks down.

In any case, what we’ve done is enough to nearly double the amount of data that’s available to describe the trajectory of median household income in the U.S. on a monthly basis, which we can now provide from January 1986 through the present. And if we keep working at it, where we have some ideas for how to telescope the analysis even further back in time, we may be able to get all the way back to 1959 – nearly a decade before the Census Bureau even began reporting its annual estimates of median household income.

And that’s how we’re celebrating our anniversary today! [If you want summarized links to our data sources and references, keep scrolling down past the "anniverary" section.]

Celebrating Political Calculations’ Anniversary

Our anniversary posts typically represent the biggest ideas and celebration of the original work we develop here each year. Here are our landmark posts from previous years:

• A Year’s Worth of Tools (2005) – we celebrated our first anniversary by listing all the tools we created in our first year. There were just 48 back then. Today, there are nearly 300….
• The S&P 500 At Your Fingertips (2006) – the most popular tool we’ve ever created, allowing users to calculate the rate of return for investments in the S&P 500, both with and without the effects of inflation, and with and without the reinvestment of dividends, between any two months since January 1871.
• The Sun, In the Center (2007) – we identify the primary driver of stock prices and describe a whole new way to visualize where they’re going (especially in periods of order!)
• Acceleration, Amplification and Shifting Time (2008) – we apply elements of chaos theory to describe and predict how stock prices will change, even in periods of disorder.
• The Trigger Point for Taxes (2009) – we work out both when, and by how much, U.S. politicians are likely to change the top U.S. income tax rate. Sadly, events in recent years have proven us right.
• The Zero Deficit Line (2010) – a whole new way to find out how much federal government spending Americans can really afford and how much Americans cannot really afford!
• Can Increasing the Minimum Wage Boost GDP? (2011) – using data for teens and young adults spanning 1994 and 2010, not only do we demonstrate that increasing the minimum wage fails to increase GDP, we demonstrate that it reduces employment and increases income inequality as well!
• The Discovery of the Unseen (2012) – we go where so-called experts on income inequality fear to tread and reveal that U.S. household income inequality has increased over time mostly because more Americans live alone!

We marked our 2013 anniversary in three parts, since we were telling a story too big to be told in a single blog post! Here they are:

• The Major Trends in U.S. Income Inequality Since 1947 (2013, Part 1) – we revisit the U.S. Census Bureau’s income inequality data for American individuals, families and households to see what it really tells us.
• The Widows Peak (2013, Part 2) – we identify when the dramatic increase in the number of Americans living alone really occurred and identify which Americans found themselves in that situation.
• The Men Who Weren’t There (2013, Part 3) – our final anniversary post installment explores the lasting impact of the men who died in the service of their country in World War 2 and the hole in society that they left behind, which was felt decades later as the dramatic increase in income inequality for U.S. families and households.

Resuming our list of anniversary posts….

• The Toolmaker’s Tool (2014) – we make the code we use for creating online tools available to all!
• Replacing GDP with the National Dividend (2015) – we explore our development of an alternative measure of economic welfare that can replace GDP.
• The Gamblers Who Invented Modern Encryption (2016) – we discover that a group of gamblers seeking to break the law in Missouri back in 1905 put together many of the elements that underlie secure electronic communications and financial transactions in 2016!
• The Isolation of El Niño (2017) – we advance the development of a global economic indicator for Earth!
• Telescoping Median Household Income Back in Time (2018) – we find a way to nearly double the available supply of monthly median household income estimates with reasonable accuracy.

Data Sources for Median Household Income From January 1986 Through October 2018

U.S. Bureau of Economic Analysis. Table 2.6. Personal Income and Its Disposition, Monthly, Personal Income and Outlays, Not Seasonally Adjusted, Monthly, Middle of Month. Population. [PDF Document, Online Database (via Federal Reserve Economic Data)]. Last Updated: 28 November 2018.

U.S. Bureau of Economic Analysis. Table 2.6. Personal Income and Its Disposition, Monthly, Personal Income and Outlays, Not Seasonally Adjusted, Monthly, Middle of Month. Compensation of Employees, Received: Wage and Salary Disbursements. [PDF Document, Online Database (via Federal Reserve Economic Data)]. Last Updated: 28 November 2018.

U.S. Department of Labor Bureau of Labor Statistics. Consumer Price Index, All Urban Consumers – (CPI-U), U.S. City Average, All Items, 1982-84=100. [Online Database (via Federal Reserve Economic Data)]. Last Updated: 14 November 2018.

References for Median Household Income From January 1986 Through October 2018

Sentier Research. Household Income Trends: January 2000 through May 2017, March 2018 through October 2018. [Excel Spreadsheet with Nominal Median Household Incomes for January 2000 through January 2013 courtesy of Doug Short]. [PDF Document]. Accessed 25 September 2018. [Note: We've converted all data to be in terms of current (nominal) U.S. dollars to develop the analysis presented in this series.]

U.S. Census Bureau. Historical Income Statistics. Table H-5.  Race and Hispanic Origin of Householder–Households by Median and Mean Income:  1967 to 2017. [Excel Spreadsheet]. Accessed 5 December 2018.