The Most Disturbing Fact About the U.S. Economy Today

There's a question no one wants to ask, but it's time we do:

What happens to the U.S. economy if American consumers get so financially strapped that they stop spending money?

You see, it's a well-known fact that 70% of the U.S economy depends on consumer spending. If consumer spending slips, it will weaken the U.S. economy, which means lower earnings - and lower stock prices.

And the household income trends that I'm about to show you suggest that this vital pillar of the U.S economy has some serious cracks in it...

The Dangerous Trend in Median Household Income

According to U.S. Census Bureau data, median household income - the level where exactly half take in more and half take in less - fell 0.2% in 2012 to an inflation-adjusted $51,017. And that's 8.3% lower than where the median household income stood in 2007, before the recession began.

What increases Americans have gotten over the years - about $11,000 since 2000 - have been more than negated by inflation.

The decline for 2012 puts inflation-adjusted median household income at a level not seen since the mid-1990s. In fact, a long-term chart of median income shows that families made less in 2012 than they did in 1989.

"The bleeding has stopped, I suppose, but incomes have yet to increase," Richard Fry, an economist at Pew Research Center told The Wall Street Journal. "Asset prices are rising, but when we look out at Main Street, at what households are getting, there isn't much growth."

It's a far cry from the years that followed the recession of the early 1990s, when the median household income rose 15%, from $48,884 in 1993 to $56,080 in 1999.

It's also worth pointing out that median household income is not median salary. Median household income includes all sources of income, including multiple wage earners. The median annual wage in the United States is much lower - just under $27,000.

So, what happened to our wages?

One reason so many Americans have seen no real income growth is the persistently high unemployment left over from the recession; 11 million Americans remain unemployed. Businesses feel no need to offer more pay when most workers are easily replaced.

And the bulk of the new jobs are in low-paying industries like retail, which means many of those who have found new jobs after the layoffs of the Great Recession are making less than they did before.

For those who ended up with lower-wage jobs, the news gets even worse.

According to the Labor Department, the average hourly pay for a nongovernment, non-supervisory worker has dropped to $8.77 from $8.85 in June 2009 - the end of the recession.

But as ominous as the decline in median income is, that's not the worst news. There's a related trend that's even more disturbing...

The Bigger Threat to the U.S. Economy

Remember, the decline in the median household income has come despite rising home prices, record highs in the stock market, and surging corporate profits.

But almost all of the gains in the U.S. economy of the past few years have gone to the very wealthy, with the top 1% collecting the lion's share, according to a recent study by the Department of Economics at the University of California at Berkeley.

The top 1% of households in 2012 were those with incomes above $394,000.

Since June 2009, an astounding 95% of the income gains have gone to the top 1%. The discrepancy has not been nearly as severe in past recoveries.

For instance, the top 1% snagged only 65% of the income gains following the 2001 recession, and just 45% of the income gains after the 1991 recession.

But the super-wealthy aren't getting massive raises. Most of the disproportionate increase in their incomes is coming from their investments.

The richest 10% of households own 90% of the stock, and so have been the primary beneficiaries of the market's 150% rebound since the bottom of March 2009.

These trends have created a widening gap between the rich and the poor in the United States. According to the Berkeley study, the top 1% of wage earners earned 19.3% of all U.S income last year - the biggest percentage since 1928. The top 10% took in a record 48.2% of all household income.

All of this is putting growing pressure on the household budgets of the average American family.

"People are making decisions and choices," National Retail Federation CEO Matthew Shay told CNBC. "They can spend on some of the things we're seeing, on autos and homes, or they can spend on other places. They're sort of choosing either/or."

With purchasing power going into reverse for most Americans, companies are going to have to compete harder for those dollars, or it will start to hit their own bottom lines.

In the past year consumer spending has hovered at about half the levels of where it usually sits during periods of typical growth in the U.S economy.

"With worker pay stagnant, why are so many surprised that consumer spending is going nowhere?" economist Joel Naroff at Naroff Economic Advisors asked in a recent note to clients. "How can consumers lead the way if they don't have the means to purchase more goods? They cannot."

Note: You can't force your boss to give you a raise, but you can boost your income through investing - just like the wealthy do. You just need the right strategy. Here Money Morning Chief Investment Strategist Keith Fitz-Gerald shares his secret to superior returns...

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