This week, the Federal Reserve released data from the Financial Accounts of the United States for the third quarter of 2013 showing that aggregate household net worth breached a new record high and has more than offset the $13 trillion decline during the “Great Recession.” However, adjusted for inflation, evaluating the distributional aspects of wealth, and taking it down to the household level tells a different story.
A clear aim of recent policy has been to stimulate a virtuous cycle – as consumers sense that they are wealthier through rising stock values and home prices, economic theory suggests they will spend more. Since consumer spending accounts for roughly 70 percent of the economy, its growth is pivotal for overall economic growth. However, although the economy is growing, our most recent edition of Housing Insights provides a sobering picture of the lopsided recovery in household wealth, which may continue to restrain consumer spending growth.
Though nominal household wealth has more than recovered from the steepest drop since record-keeping began in 1952, real (inflation-adjusted) wealth per household remains below its pre-recession peak. Furthermore, the relatively stronger recovery in financial wealth has disproportionately benefited high net worth households due to its highly concentrated nature. At the same time, housing wealth has lagged significantly during the current recovery despite its instrumental role as the primary source of wealth among less wealthy households.
The implications of these findings are broad in scope but directly tie to our outlook for economic growth next year, which is modest when compared to the consensus (i.e., Blue Chip) and the Federal Reserve. Our analysis suggests that the current recovery in household wealth is sub-par when compared to previous cycles and therefore that the traditional positive impact of rising wealth on consumer spending may be overstated in the current cycle. Indeed, the very nature of the recent housing crisis – leaving real housing wealth per household a stunning 39 percent below its pre-crisis peak – has limited the transmission of monetary policy to household balance sheets and the economy.
Read this edition of Housing Insights for more information.
Doug Duncan, SVP and Chief Economist
Economic & Strategic Research
December 9, 2013
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