Household Wealth: Has It Recovered?
William T. Gavin
Federal Reserve Bank of St. Louis Economic Synopses, 2013, No. 16




Adjusting for inflation, population growth, and a risk-free real interest rate shows there is still a substantial gap between the peak of household wealth in 2007 and the level today.

The 2012:Q4 flow of funds data released on March 7, 2013, by the Federal Reserve reported that the net worth of households and nonprofit organizations rose to $66.1 trillion.1 Taking this as a measure of household wealth, the financial press reported that household wealth had risen to within 2 percent of its previous (pre-recession) peak in 2007:Q3. Determining whether households are nearly as wealthy now as then is complicated. Hard-to-measure factors, such as human capital, the distribution of wealth, and the tax liabilities of the wealthy, could be considered in a more extensive analysis. Here, I make a determination that depends on some factors more easily measured—population growth, inflation, and a risk-free real interest rate. The risk-free real interest rate matters because it determines how large the flow of future real consumption guaranteed from a given amount of wealth can be.

I use the chain price index for personal consumption expenditures (PCE) to deflate nominal household wealth. I also divide total wealth by the population of the United States. To account for changes in the real interest rate, I assume a representative household that wants a constant monthly income for the next 10 years. The household invests in a 10-year annuity indexed for inflation with no default risk. The inflation-adjusted risk-free real interest rate is measured by the rate on long-term Treasury inflation-protected securities (TIPS). Annuity payments are similar to mortgage payments. For example, when a bank makes a 10-year conventional fixed-rate mortgage loan, it receives a fixed amount each month for 120 months, at which time the mortgage is paid off and monthly payments end. An annuity pays the holder in a similar fashion.
The table shows the different measures of household wealth—the interest rate on long-term TIPS and the per capita levels of real PCE—for three particular quarters: 2007:Q3, when the flow of funds measure of household wealth peaked; 2009:Q2, when the recession ended and that measure troughed; and 2012:Q4, the most recent quarter for which the data are available.
As shown in the first column, aggregate household wealth in 2012:Q4 was $66.1 trillion, 26 percent higher than the end-of-recession level and only 2 percent lower than the 2007 peak. After adjusting for population growth, it is still 23 percent higher than the 2009 trough but 6 percent lower than the pre-recession peak. Inflation has been modest, but it makes real wealth appear even lower today. Per capita real household wealth in 2012:Q4 was just 14 percent above the 2009 trough and 15 percent below the 2007 peak. The TIPS interest rate in 2007:Q3 (the fifth column in the table) was 2.38 percent—near its 2.35 percent end-of-recession trough—but fell to –0.09 percent in 2012:Q4. (For simplicity, as shown in the table, I assume that the rate was zero in 2012:Q4.) Based on the TIPS interest rate, the annuity value of household wealth in 2012:Q4 was just 1.7 percent above its end-of-recession trough but still 24 percent below its 2007 peak.
An interesting observation emerges when the artificial 10-year annuity is compared with the monthly average of per capita real PCE. The comparison shows that monthly income from household wealth would have been 77 percent of per capita real PCE in 2007:Q3, just 60 percent by the end of the recession, and an even lower 58 percent by 2012:Q4. Although flow of funds data suggest household wealth has nearly rebounded to its pre-recession peak, adjusting for inflation, population growth, and a risk-free real interest rate shows there is still a substantial gap between the peak of household wealth in 2007 and the level today.
1 See line 42 in the March 7, 2013, data release for the Balance Sheets of Households and Nonprofit Organizations;

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Category: Think Tank, Wages & Income

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11 Responses to “Has Household Wealth Recovered?”

  1. winstongator says:

    Is the productive capacity of the world less now than it was in 2007? That is a rough measure of aggregate household wealth. Factories have not been destroyed, and there has been capital investment, so I would say there is a higher ‘capacity’.

    Is the world producing less? Very possible, considering vast idle labor resources. Tangible potential productivity is a product of capacity and willingness to deploy those resources. While the first term has not suffered, the second has. These are, for the most part, renewable resources – labor! To sum my impression of what the fed is trying to achieve, it is to encourage the deployment of more resources. It should also be obvious that this issue of idle resources is much more acute in Europe than the US. It should also highlight the monetary policy differences, as the US has been more active, while ECB has done only enough to stave off crisis.

  2. stonedwino says:

    The answer from Main Street is, No! Wages for the Joe 6-pack have gone nowhere fast, loads of people underwater with their homes and debt is still an issue. Household wealth for the wealthy? Sure, that has recovered, but on Main Street, except for food, fuel & healthcare, all other expenditures seem to be going the deflationary route as far as I can see…

    • Robert M says:

      Agreed! I would add that rental costs are highly inflationary and absorb more of income than is registered by any government index. The cycle of housing, its usual attribute of wealth for Main Street and most of Main Street being unable to come up w/ down payments(loss/expenditure of savings during Great Recession and/or lack of pay increases) simply can not contribute.

  3. ancientone says:

    These numbers would tell us a lot more if they were broken down by quintile. A few billionaires can screw up total population averages quite a bit.

  4. DMAngeli says:

    Inflation for goods & services will rise as we already are seeing. But this time things will be worse becasue there is NO wage inflation and no interest income. This will be very devastating for the American people.

    • So far, we have had DEflation, which is slowly becoming INflation.

      That is a feature, not a bug, of QE.

    • jib10 says:

      You can not get broad based inflation unless wages rise. What happens is that inflation occurs in the areas where people have to spend money, food, energy, housing (rent), but since wages have not risen, they have to cut money from other spending in order to spend more on the required spending. You get inflation in the basic spending and deflation in the discretionary spending. Add it together and you get 0% inflation.

      But the economy changes as money is moved from restaurants, vacations and big boy toys to food, fuel, and rent.

      And in the end the average American find themselves spending a larger % of their income on basics like food and shelter. Which is one definition of a declining standard of living.

      • Alex P says:

        jib10 nailed it.

        This is exactly what has been happening since the end of the Great Recession. This is part of the reason you see > 10% YOY gains in housing prices in certain markets (Seattle for one), but also see record low prices on computers, flat screens, and other non-essentials. Additionally, the fact that the US economy is largely based on this discretionary consumer spending is why we are still in a slump. QE and ZIRP are doing little to nothing for wage growth or hiring. QE will only begin to help “Joe 6pack” when inflation helps erode his high debt levels.

  5. DeDude says:

    I think we need to look at what kind of wealth. If your wealth was mostly investments you may have recovered a lot better than if your wealth was mostly home equity. So yes certain types of people have recovered their wealth and others are still far below. Unfortunately those that are still far below are also the type of consumer class people who we need to recover so they can drive up the economy.

  6. Livermore Shimervore says:

    This question highlights the problem with wealth in America: It’s a one trick pony.

    Household wealth in America is plowed single-mindedly into one asset class: the home.

    The Home is a sea of escalating costs.
    The Home is a pawn in the games of the Fed.
    The Home is a pan in the games of the banks, real estate lobby and refi shops.
    The Home is a pawn in the endless securitization games of Wall Street.

    The Home, save for the fancy zip codes, is still is over-valued when you look at historical prices despite all of these foreclosures, artificially delayed foreclosures and rock bottom interest rates.

    But most importantly, if the average American is going to ignore all other asset classes and plow everything into the mortgage, then they live and die on trend in wages and job growth. Which means that unless you live in South Florida where a sea of wealthy Colombian, Venezuelan, Brazilian and Chinese offshore cash is going to lift real estate value, then average American household net worth is not going to rise unless the average income of their home’s zip code is out-pacing the cost to own. Without that wage growth that house, a.k.a. their net worth, wil not move upwards short of another debt bubble.

  7. DeltaV says:

    Most of the much-vaunted income recovery has accrued to the top 5% of earners, and by far the largest portion of that has gone to the top 2.5%. The top 5% already had far less of a debt burden (relative to income and net worth) than the bottom 95%, so the effect of QE was really to enrich those who did not have any problems servicing their debt. The Federal Reserve has frequently exulted in the reduced debt service, but in fact except for foreclosures there has been almost no net deleveraging for the bottom 95%, and as well no net income growth. Instead, unearned income has continued to increase its share of GDP.

    Bottom line: Unless the plan is to increase taxes on the top 5% (which will tend to increase the liability of the state and reduce productivity) managing to averages (as the Fed has done) makes no sense, and reporting a recovery is a shallow deception.

    Note: My statistics are current as of FY2011. If there is better and newer information, please let us know. Thanks!