Americans struggle to regain their wealth

Americans’ long journey to regain the wealth they lost in the recession is stalled.

By (AP)

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Published: Sat 18 Sep 2010, 3:18 PM

Last updated: Mon 6 Apr 2015, 9:30 AM

Households failed even to run in place during the April-June quarter as sinking stock prices eroded wealth. Stocks have since rebounded. But based on last quarter’s data, household net worth would have to rise 23 per cent to revisit its pre-recession peak.

Net worth — the value of assets like homes and investments, minus debts like mortgages and credit cards — fell 2.7 per cent last quarter, or $1.5 trillion, the Federal Reserve said on Friday. It now stands at $53.5 trillion.

That’s above the bottom hit during the recession, $48.8 trillion in the first quarter of 2009. But it’s far below the pre-recession peak in wealth of $65.8 trillion.

The drop from April to June was the first quarterly decline in America’s wealth since early 2009. Before then, net worth had risen slowly for four straight quarters.

Economists generally think household wealth has ticked up in the July-to-September quarter so far, because of higher stock prices. Yet given last quarter’s setback and expectations of scant gains ahead, some economists have pushed back their forecast for when Americans will regain all their lost wealth: Not until the middle of this decade.

Their stagnant wealth is likely to keep Americans reluctant from spending freely — and the struggling economy from picking up strength. Consumers tend to spend according to how wealthy they feel. And their spending accounts for about 70 per cent of the economy. In the meantime, people are saving more and paring debt, Friday’s data showed.

The decline in net worth from April to June amounted to an average drop of $12,941 per household. Average household wealth now amounts to $455,173. That’s up from $415,185 during the recession. But it’s down from a peak of $563,438 in 2007.

One reason why economists foresee only slight gains in wealth is they expect real-estate values to stay weak. Residential real-estate accounts for 32 per cent of net worth; individual stocks make up 13 percent. The balance includes retirement accounts, taxable mutual funds, bank accounts, bonds and possessions such as cars and jewellry.

During the recession, sinking home equity and stock prices made shoppers skittish. More than a year after the recession is thought to have ended, the housing and stock markets remain fragile. That’s why most Americans aren’t spending as freely as they typically do after recessions.

Consumer spending grew at an annual rate of just 2 per cent last quarter, about the same pace as in the first three months of this year. Most economists think Americans will spend at about the same pace, or only slightly better, in the current quarter.

By contrast, after the 1981-82 recession, consumer spending averaged a robust 6.5 per cent pace over the four quarters of 1983.

“Consumer spending is going to show only stunted growth this year because the wherewithal to spend — jobs, income, wealth are only inching higher,” said Ken Mayland, president of ClearView Economics.

Another reason why shoppers are unlikely to ramp up their spending: Their faith in the economy is sagging. Consumer confidence dropped in September, according to the University of Michigan/Reuters’ consumer sentiment index fell released Friday.

Carla Fehribach, a retired airport ticket agent, said the stock market’s failure to generate any real growth so far this year has made her more cautious about spending. “I’ll feel a little more comfortable about spending more if the stock market and the economy turn around,” said Fehribach, 67.

Americans saved 6.1 per cent of their disposable income from April to June, the highest quarterly total in a year.

And they are slowly trimming their debt.

Overall household debt dipped to $13.45 trillion in the second quarter. That’s a 3.2 per cent decline from a peak in early 2008. People, on average, are carrying around $43,000 in debt — from mortgages and credit cards to auto loans and home equity lines.

People who defaulted on mortgages and other loans accounted for some of the decline in debt. But many households are paying down debts and are reluctant to take on new loans, analysts said.

The decline in net worth underscores how much household wealth depends on stock values. About a fifth of total household financial assets are in stock-market holdings. The value of households’ stock portfolios dropped to $6.8 trillion last quarter — a 12 per cent decline from the first three months of this year.

Americans’ home equity isn’t making up for the loss in their stock values. Last quarter, US real estate values ticked up a scant 0.3 per cent compared with the January-March quarter.

And many economists expect the home market to weaken further now that a federal home buyer tax credit has expired. Most economists expect home prices to decline around 5 per cent to 10 per cent by the middle of next year.

Optimism about stocks has been sparked by the gains they have made since June 30. The Standard & Poor’s 500 index a broad gauge of the market, has recovered about two-thirds of the its loss during the April-through-June period. Stocks are now up just under 1 per cent for 2010.

That translates into modest advances in wealth since the period covered by the latest government report. As measured by the Dow Jones US Total Stock Market Index, stock values have gained $260 million between June 30 and the close of trading on Thursday. About $11.6 billion is now invested in US stocks.

Though the S&P 500 remains 28 per cent below its peak on Oct. 9, 2007, employees who have stayed invested in 401(k) plans and continued to contribute have fared better. About 78 per cent of them now have more money in those accounts than before the market top three years ago, according to estimates by Jack VanDerhei of the Employee Benefit Research Institute.

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