Still Digging Out (William R. Emmons and Bryan J. Noeth Commentary)

by William R. Emmons and Bryan J. Noeth  on Monday, Sep. 2, 2013 12:00 am  

Although aggregate current-dollar household net worth reached an all-time peak at the end of the first quarter of 2013, the average level of household wealth adjusted both for inflation and population growth remained significantly below its highest point ever, which was reached at the end of the first quarter of 2007. Average inflation-adjusted net worth per household declined about 26.1 percent between the first quarter of 2007 and the first quarter of 2009, its lowest point during the recession; in the four years since, it has recovered about 62.8 percent of that decline. Thus, the recovery of household wealth remains incomplete.

Aggregate household net worth in current dollars. As reported by the Federal Reserve Board on June 6, the aggregate net worth of all U.S. households (total assets minus total liabilities) reached $70.3 trillion at the end of the first quarter of 2013. This is an increase of about $3 trillion from its year-end 2012 level, exceeding the previous all-time high by $2.3 trillion, recorded at the end of the third quarter of 2007. Stock prices and house prices increased significantly during the first quarter of 2013, while household debt changed little. The latest figure ($70.3 trillion) represents an increase of $18.3 trillion from its lowest level reached during the recent recession, at the end of the first quarter of 2009. Expressed as a percent of the peak-to-trough decline in wealth, the recovery so far represents 114.3 percent of the loss.

Inflation and population growth. These aggregate current-dollar figures do not reflect growth either of the price level or of the population. Increases in the price level — inflation — reduce the purchasing power of a dollar over time. Cumulative population growth implies that wealth is shared by more people. Adjusting aggregate net worth for inflation and population growth translates the figures into terms that are most relevant to, and representative of, an individual family.

Inflation: During the six years since inflation- and population-adjusted household net wealth reached its peak (end of the first quarter of 2007), the Personal Consumption Expenditures (PCE) price index (a measure of inflation) increased by a cumulative total of 11.9 percent, or at an annualized rate of 1.9 percent.

Population: Over these same six years, the number of households reported by the Census Bureau increased by a total of 3.9 million (3.5 percent), or at an annualized rate of 0.6 percent.

Inflation-adjusted aggregate household net worth. Adjusting aggregate current-dollar net-worth figures for inflation only, aggregate household wealth at the end of the first quarter of 2013 had returned to 93.3 percent of its peak level, which was reached at the end of the second quarter of 2007. As the chart shows, inflation-adjusted aggregate net worth first reached its 2013:Q1 level some 7 1/4 years ago, at the end of the fourth quarter of 2005.

Inflation- and population-adjusted household net worth. Adjusting aggregate current-dollar net-worth figures both for inflation and population growth, average inflation-adjusted household net worth at the end of the first quarter of 2013 had returned to 90.3 percent of its peak level, which was reached at the end of the first quarter of 2007. Average inflation-adjusted net worth first exceeded this level 7 3/4 years ago, at the end of the second quarter of 2005.

In inflation- and population-adjusted terms, average household net worth has recovered $95,335 from its low point at the end of the first quarter of 2009. To return to its all-time high, average inflation-adjusted net worth would need to increase an additional $56,476 plus an amount that reflected any cumulative inflation or population growth that occurred during that recovery period.

Expressed in terms of 2005 dollars, the level of average inflation-adjusted net worth was:

  • $582,299 at its all-time peak at the end of the first quarter of 2007,
  • $430,487 at its recent trough at the end of the first quarter of 2009 and
  • $525,822 at the end of the first quarter of 2013.

Reprinted with permission from the June 6 issue of In The Balance, a publication of the Federal Reserve Bank of St. Louis’ Center for Household Financial Stability.

 

 

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