Family Wealth Drops Sharply

Buried in all the news today was the release by the Federal Reserve Board of their survey of household wealth. The full report is here [warning: this is a long document!]: Changes in Family Finances 2004 – 2007

The report is produced every three years so this latest version, which studies the period 2004 to 2007 is dated, but is the best available we have for taking a look at the progress of the average American household.

The news is decidedly mixed.

Net worth adjusted for inflation grew 17.7% to an average of $120,300, during the period to 2007, but obviously a lot has happened since. It is probably better to look at the median rather than the mean for a view on the average since the latter can easily be skewed by the relatively small number of very wealthy households at the top of the scale. The median is simply the half way point with half of all households above and half below, which eliminates the skew.

When we look at the median for October this year it is $98,900, or 3.2% down from its 2007 peak, and also down 2.0% from the level it reached in 2001 just after the dot com bubble burst. If we add in the additional drop in stock prices of 15% and home prices of 2% since October, there is no doubt that households are in much worse shape than at any time since the turn of the century. In effect the average American family is significantly worse off than they were back in the late 1990’s.

One reason is that incomes have been stagnant. The median in 2007 was $47,300, virtually unchanged since 2004. The report also sheds light on what we already knew: that high end earners did very well. The mean for all families rose during the same period to $84,300 a gain of 8.5%, but the major portion of the rise came at the top, and the whopping 20% gain for the upper ten percent of earners who saw their incomes leap to a mean of $398,000.

All this is one further reason why the economy is stuck in decline. The much vaunted ‘wealth effect’ that economists saw as a major supporter of growth during the 1990’s and the past decade has gone into a sharp reverse. This fact alone would cause a recession. Add in the poor unemployment outlook and the mix is toxic.

No wonder GDP is so anemic.

We have a long road ahead before we return to any growth let alone reach the plateaus of the 2000/2001.

What a mess.