Household Net Worth: Here’s the ‘Real’ Story

Let’s take a long-term view of household net worth from the latest Flow of Funds report. A quick glance at the complete data series shows a distinct bubble in net worth that peaked in Q4 2007 with a trough in Q1 2009, the same quarter the stock market bottomed. The latest Fed balance sheet shows a total net worth that is 34.6 percent above the 2009 trough at a new all time high 8.4 percent above the 2007 peak. The nominal Q4 net worth is up 1.8 percent from the previous quarter and up 11.5 percent year over year.

But there are problems with this analysis. Over the six decades of this data series, total net worth has grown about 7159 percent. A linear vertical scale on the chart above is misleading because it fails to provide an accurate visual illustration of growth over time. It also gives an exaggerated dimension to the bubble that began in 2002.

But there is another more serious problem, one that has to do with the data itself rather than the method of display. Over the same time frame that net worth grew seven-thousand-plus percent, the value of the 1950 dollar shrank to about nine cents. The Federal Reserve gives us the nominal value of total net worth, which is significantly skewed by money illusion. Here is my own log scale chart adjusted for inflation using the Consumer Price Index.

Here is the same chart with an exponential regression through the data. The regression helps us see the twin wealth bubbles peaking in Q1 2000 and Q1 2007, the Tech and Real Estate bubbles. The trough in real household net worth was in Q1 2009. From that quarter to the latest data point, net worth initially trended at about the same growth rate as the overall regression but has improved over the last four quarters. We are currently 5.1 percent below the regression.

Let’s now zoom in for a closer look at the period since 2000. I’ve added some callouts to highlight where we are currently with regard to the all time peak and 2009 trough.

Let’s now compare the nominal and real statistics for the peak-to-trough and recovery-to-date.

  • Peak: The pre-recession nominal peak occurred in Q3 2007. The real pre-recession peak occurred in Q1 2007. The Q2 2013 nominal net worth now is 8.4 percent above previous peak. The real net worth is 4.5 percent below peak.
  • Trough: The nominal and real troughs occurred in Q1 2009, the same quarter that the market bottomed. The nominal peak-to-trough decline was 19.5 percent. The real decline was 22.0 percent.
  • Recovery to date: The latest Flow of Funds report shows a nominal recovery of 34.6 percent off the trough. The real recovery is 22.5 percent.
  • Quarter-over-quarter: Nominal total net worth in Q2 increased 1.8 percent from the previous quarter. The real increase was 1.3 percent.
  • Year-over-Year: Nominal total net worth in Q2 rose 11.5 percent from Q2 2012. The real increase was 9.9 percent.

We’ll take another look at the nominal and real numbers after the release of the Q3 2013 Flow of Funds data in December.

Here’s how the major U.S. indexes traded on Monday:

Dow Jones Industrial Average Index Chart - Yahoo! Finance

Doug Short Ph.d is the author of dshort at Advisor Perspectives.

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