Income expectations are not a common topic in the economic outlook, kept in the background by record highs in inflation expectations. But income expectations have just hit their own records, new lows buried in Tuesday's consumer confidence report from the Conference Board which proved troubling all the way around. Inflation, soft wages, and sliding home prices are coming together to undermine consumer confidence in income.

This report picks up from a Market News International interview I did earlier this week with Lynn Franco, survey chief for the Conference Board's report who stressed that the consumers' sense of their own purchasing power is in trouble. This report will focus solely on the future income component of the report, one of three components to make up the expectations index, which is at a record low, and one of five components to make up the headline consumer confidence index, which is very near a record low. The future income component is made up of three sub-components: those seeing higher income six months out (blue and on the decline in the accompanying graphs), those seeing lower income (red and on the rise), and those who see no change (not depicted).

In 41 years of Conference Board data, never have those who see their income declining outnumbered those who see their income rising — that is until now. In May, 14.6 percent said their income would decline, above the 14.1 percent who saw an increase — again, the very first time this inversion has appeared. The second inversion is for June which shows deepening concern at 15.9 percent pessimists vs. 14.6 percent for optimists. The graph below, as all subsequent graphs, begins in January 1970 with the two halves, the optimists and the pessimists, offering a mirror image of each other (data and republication courtesy of the Conference Board).

Gas prices are the first place to turn for an answer. The graph below compares income pessimists against the year-on-year change in gasoline prices as measured by the Bureau of Labor Statistics. In theory, when gas prices rise, more people will expect their income to weaken. In this case, income means purchasing power (a double meaning at play in the Conference Board's question). The results are uncertain but early on in the 70s pessimism spiked in reaction to gas prices as it did to a less severe extent in the late 70s up to 1980. A gas spike in 2000 caused no change for expectations, but a subsequent run of near double-digit percentage increases do match rising and now spiking pessimism.

Food prices are of course also on the rise but a comparison with income expectations doesn't show much correlation. But a look at total purchasing power is of interest. When purchasing power is down, income optimism should be on the decline — a relationship seen in the graph below. Purchasing power (aqua line) has posted an unending string of declines, at a year-on-year 4 percent or so in recent data for the worst rate since the early 90s. Income optimism held steady at historically low rates through most of this decade before breaking now to record lows. Note the giant dip in purchasing power in the late 70s and early 80s, a reflection of double digit inflation that peaked at 14.6 percent in mid 1980.

Double-digit inflation depressed real wages which fell as much as 6 percent during the 1980s crunch. The graph below compares real average hourly wages that is adjusted for inflation, against income optimism. The crunch in 1980s had remarkably no effect on income optimism, though changes in the two have tracked closely since the early 90s. A jump in real wages in 2006 led to only a tentative rise in optimism. Both have been sinking through this year.

A look at the unemployment rate shows the strongest relationship of all, a confirmation of sorts for the giant 5 tenth spike in May's unemployment rate. The graph below tracks the unemployment rate against income pessimism. Pessimism and the rate moved together closely in the early 70s before the unemployment rate shot well ahead until the 90s. The two since are moving very closely, that is until the last couple of months as pessimism has jumped — a jump that points to further spikes in the unemployment rate.

The final graph is a reminder that a whole group of factors is depressing the consumer — a convergence that may very well be unmatched in the economic record books. The graph below tracks year-on-year changes in home prices against income optimists. What's striking is how severe the contraction is in home prices, by far the most severe in available data going back to the late 60s. Home price erosion is at a record high while income optimism is at a record low.

Bottom line

Market talk isn't likely to center on income expectations especially as inflation expectations are at record highs. But weak income expectations are perhaps at the center of a broad pessimism that has pushed consumer confidence readings to all time lows, beyond prior lows made in other times of war, times of great inflation, times of recession, and even following market crashes.