Household Net Worth Continues To Fall

According to a Federal Reserve report earlier this month, 2008 was the worst year on record for US household net worth, expressed by assets minus liabilities (loans).

“Household net worth in the United States declined by $11.2 trillion (-18%) last year and Americans curbed their spending as they watched the value of their assets fall. It was the worst yearly decline in household net worth on record.

In the 4Q of last year alone, household net worth plunged by $5.1 trillion (-9%), the largest quarterly drop in dollar terms on record, going back to 1951, when the government began keeping quarterly records.”

On June 11, the Federal Reserve reported “that US household net worth plunged $1.7 trillion (-2.6%) in the first three months of this year.  That followed the record large drop in 2008 when household net worth plunged (18%).  The 1Q of this year marked the seventh consecutive quarterly drop in household net worth.”

Primarily the continued decline in home values and the stock markets in the 1Q, plus the significant rise in the unemployment rate caused the continued swift decline in household net worth, once again.

The Fed reported that “the value of household real-estate holdings, mostly home residences, fell 2.4% in the 1Q to $50.4 trillion overall, down from $51.7 trillion at the end of 2008. Collectively across the US, homeowners had 41.4% equity in their homes in the 1Q, another record low. That was down from 42.9% in the 4Q of last year.”

Making matters even worse, the damage to US household wealth in the 1Q also came from the sinking stock market. “The Fed reported that the value of Americans’ stock holdings dropped 5.8% from the final quarter of last year.”

While the equity markets have rebounded nicely since the early March lows, home values have continued to fall; so household net worth on average is almost certainly lower today than it was at the end of March being latest data available.  And, of course, many Americans and foreigners as well, bailed out of the stock markets late last year and early this year and have not yet returned.

Consumer-spending as part of GDP accounts for 66%-72%. Almost every forecaster that is predicting an end to the recession in the second half of this year is counting on a revival in consumer spending.  This is wishful thinking in the light of the continued fall in household net worth.

It is true that there have been some bright spots over the past few weeks.  Consumer confidence has picked up over the last few months from very low levels, although it declined slightly in June as reported today.  Personal income saw a healthy 1.4% jump in June, thanks in part to the government’s stimulus checks.  Personal spending and retails sales ticked up slightly in May.

Yet most Americans are increasing their savings significantly, which is more money that will not find its way into cash registers. “The Commerce Department reported last Friday that the personal savings rate spiked to 6.9% of disposable income in May, up from 5.6% in April and 4.3% in March.  The May savings rate of 6.9% was the highest since December 1993.”  Most analysts believe the personal savings rate is on its way up to 10% by year-end.

So, in addition to the continuous decline in household net worth, which is likely to persist all year as home prices fall further, the rapidly rising savings rate does not bode well for a lasting surge in consumer spending and consequently bringing the crisis to an end soon.  This is a key reason why we will not emerge from this recession until some time in the future.