With the stock market making new all-time highs seemingly everyday, the belief of a true recovery taking hold across many sectors of the economy is gaining strength. However, the rebound in asset prices should receive a healthy dose of skepticism.
It’s no secret that the Federal Reserve has been trying to create a wealth effect. Over the past several years, the central bank has injected record amounts of liquidity into the financial system, with hopes of forcing investors into riskier assets such as stocks. The idea is that an economic recovery will form as higher asset prices cause more people to feel confident and spend money.
Although consumer sentiment has improved to its highest level in almost six years, the wealth effect is not being felt by the majority of the nation. Between the first quarter of 2009 and the fourth quarter of 2012, American households have recovered $14.7 trillion in wealth, according to a new report from the Federal Reserve Bank of St. Louis. Of that total, $9.1 trillion is due to the rising stock market.
Since stocks are most widely held among the wealthiest households, the central bank admits the rebound in net worth is misleading. Most families have recovered much less than the average amount. Other factors are also causing distortions in the nation’s recovery.
The aggregate household net worth at the end of 2012 was $66.1 trillion, almost back to the peak reached in the third quarter of 2007. However, the effect of inflation is often ignored when these numbers are discussed. Using the very modest inflation numbers provided by government data, consumer prices have increased about 2 percent since the peak in household wealth. As a result, the inflation-adjusted net worth of households has only recaptured 56 percent of the losses seen during the Great Recession, compared to 91 percent on an unadjusted basis.
The Federal Reserve Bank of St. Louis even goes on to calculate the net worth of households adjusted for inflation and population growth. The wealth of all American households is now shared by more families. Taking into account the additional 3.8 million new households formed over the past five years, Americans have recaptured only 45 percent of their wealth.
The report explains, “Clearly, the 91 percent recovery of wealth losses portrayed by the aggregate nominal measure paints a different picture than the 45 percent recovery of wealth losses indicated by the average inflation-adjusted household measure. Considering the uneven recovery of wealth across households, a conclusion that the financial damage of the crisis and recession largely has been repaired is not justified.”
A report released earlier this year found similar conclusions. During the first two years of the ‘economic recovery,’ the wealthiest households enjoyed the majority of the rebound. The mean net worth of households in the upper 7 percent of the wealth distribution surged 28 percent to $3,173,895 between 2009 and 2011, according to the Pew Research Center, and data from the Census Bureau. In comparison, the mean net worth of households in the lower 93 percent declined by 4 percent.
The dividing line between the two sets of households is $836,033. The wide difference is contributed to the fact that upper households are more likely to hold stocks and bonds, which have rallied a significant amount over the past several years with the help of the Federal Reserve. The less affluent households typically have the majority of their wealth concentrated in their homes.
The 8 million American households in the top 7 percent witnessed their aggregate wealth increase $5.6 trillion from 2009 through 2011. Meanwhile, the bottom 111 million households experienced a $600 billion decline in estimated aggregate net worth.
During the period of the study, the S&P 500 increased 34 percent, and continues to rise even higher. On the other hand, the S&P/Case-Schiller home price index declined by 5 percent and remains well below its glory days of the housing bubble.
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