A new census found that median household income in the US had risen by 5.2% in 2015 compared to the rise in income in the previous year. Although this is good news, the data turns out to be more a reflection of the health of the labor market, rather than the health of the economy. In other words, rising median income, according to a New York Times article, was due to the expansion in employment.
Although gains were made in median household income, we have yet to see the market move in the direction that one would predict it to move if the health of the economy had adequately recovered. According to a Financial Times article, the months prior to the past month of August have shown decent consumer spending. However, last month has shown flat consumer spending. Despite these movements, corporate investment has not followed the shifts in consumer spending. If consumer spending at several points dramatically increased, why hasn’t real corporate investment?
What this tells me is that investors believe that the economy has not adequately recovered. In fact, investors are still skeptical despite the income gain in 2015 (or the less than 5% unemployment rate) and the rise of consumer spending.
Thus, while corporations can raise their share price by either bloating their reserve with cash or put that cash to work by investing in jobs or R&D, corporations reacted to prior month’s increased consumer spending by holding their growing cash. Furthermore, when consumer spending flattened last month, corporations reacted with share buybacks. This seems to give indicia that investors see the economy as weak notwithstanding recent good news and would rather use financial gimmicks than make real investments to prop up or maintain share prices.
This should put things into perspective. We should celebrate that the median household income has grown robustly, but we are not to fall into the trap of blind optimism. Although these gains were made, median household income is still 1.6% lower than the median income in 2007.