Consumer Expenditure Survey data for a reference family of four persons (two adults and two children). The procedure should be to specify a percentage of median annual expenditures for such families on the sum of three basic goods and services—food, clothing, and shelter (including utilities)—and apply a specified multiplier to the corresponding dollar level so as to add a small amount for other needs.

RECOMMENDATION 2.2. The new poverty threshold should be updated each year to reflect changes in consumption of the basic goods and services contained in the poverty budget: determine the dollar value that represents the designated percentage of the median level of expenditures on the sum of food, clothing, and shelter for two-adult/two-child families and apply the designated multiplier. To smooth out year-to-year fluctuations and to lag the adjustment to some extent, perform the calculations for each year by averaging the most recent 3 years' worth of data from the Consumer Expenditure Survey, with the data for each of those years brought forward to the current period by using the change in the Consumer Price Index.

A concern with an updating procedure that adjusts for real increases in consumption is that the poverty thresholds will be too closely tied to changes in the business cycle. Our proposed updating procedure should moderate such fluctuations, both because of the use of 3 years' worth of expenditure data to calculate the reference family threshold each year and because the updating is tied to the basic necessities of food, clothing, and shelter.

The lack of a consistent historical time series of CEX data limited our ability to assess the performance of our updating procedure over the past 30 years. With data available beginning in 1980, however, we were able to determine that our procedure is less sensitive to the business cycle than a completely relative updating procedure (e.g., one-half median income or expenditures). Also, our procedure in fact performed conservatively over this period, in that the thresholds increased in real terms but not as much as thresholds derived in a completely relative manner (see Chapter 2).

Nonetheless, for evaluation purposes, we believe it would be useful to produce a second set of poverty rates from the proposed measure in which the thresholds are updated only for price changes. This second set of rates will permit evaluating changes in the official rates, based on updating the thresholds according to our recommended procedure, relative to changes in the business cycle.

RECOMMENDATION 2.3. When the new poverty threshold concept is first implemented and for several years thereafter, the Census Bureau should produce a second set of poverty rates for evaluation

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