Slowly, Americans are regaining their lost wealth

March 12th, 2010

US Household net worth rose last quarter, mainly due to rising stock portfolios.
The Federal Reserve said Thursday that net worth rose 1.3 percent in the fourth quarter to $54.2 trillion. This marked the third straight quarter of gains. Economists, however, say that consumers will need a stronger and more prolonged increase in their wealth to persuade them to ratchet up spending. Net worth is the value of assets such as homes, checking accounts and investments minus debts like mortgages and credit cards.

Growth
Americans’ net worth still has to rise an additional 21 percent just to get back to its pre-recession peak of $65.9 trillion. That illustrates Americans’ vast loss of wealth from the worst downturn since the 1930s. Growth in stock portfolios delivered the biggest lift to net worth in the October-to-December period. The value of stocks rose by nearly 4 percent to $7.7 trillion. Higher home prices helped a bit. The value of real-estate holdings edged up 0.2 percent.

The plunge
During the recession, which began in December 2007, household net worth had plunged as low as $48.5 trillion in the first quarter of 2009. Stock holdings and home values nose-dived. As their net worth evaporated, Americans felt less inclined to spend. For all of last year, consumer spending dropped 0.6 percent. This year the economy and financial conditions slowly recover; consumer spending is projected to grow around a modest 2.2 percent, according to the National Association for Business Economics.

The climb
In 1983, when the economy was recovering from the 1981-82 recession, consumer spending surged 5.7 percent. Unlike past rebounds led by ordinary shoppers, this one so far has been driven by spending from businesses, foreigners and government stimulus. Consumers have been spending more lately, but they remain cautious. “It would take a string of increases of a size that they believe can continue and that they can have faith in for consumers to boost their spending,” said Scott Hoyt, director of consumer economics at Moody’s Economy.com. Each dollar increase in household wealth translates into roughly three to four cents of consumer spending over two years, Hoyt said. That’s not much.

Retirement accounts
Holders of 401(k) retirement accounts have recovered somewhat from the walloping they took in the meltdown. But even with continued contributions to those accounts, many are still struggling. Average account balances for 401(k) contributors ages 45 and older remained 2 to 3 percent lower at the end of December than at the end of 2007, according to the Employee Benefit Research Institute.

Diminished worth
Concern about their diminished net worth also led many Americans to reduce their borrowing last year. Household debt, including mortgages, credit cards, auto and student loans, contracted at an annual rate of 1.75 percent in 2009, the Fed report said. It was the first annual decline on record.

Back to normal
Not until 2012 does Hoyt think household wealth will return to its pre-recession levels. A severe setback to the economy could delay it further, he added.

This entry was posted on Friday, March 12th, 2010 at 9:48 am and is filed under Economy, Finance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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