US Household Wealth: How The Mighty Have Shrunk

Earlier Thursday, the Federal Reserve’s Flow of Funds indicated that household net worth fell to $50.38 trillion during 1Q09, down $1.33 trillion or 2.6% from the 4Q08 level. The level for 1Q09 was the lowest since the 3rd quarter of 2004, with the ongoing recession whacking stock portfolios and home prices. (For another take on these numbers, please see Dirk van Dijk’s recent blog.)

It is important to note that figures for 1Q09 do not completely reflect the entire gain experienced in the current rally. And the good news is the rate at which household net worth contracted moderated from the 8.6% recorded for 4Q08, which was the deepest point of the recession so far, and the largest single-quarter decline reported since 1951.

The Dow Jones U.S. Total Stock Market Index, declined $8.0 trillion at the 12-year low record March 9, 2009, down from $19.2 trillion achieved in October 2007. Since early March 2009, the market increased $3.1 trillion, but is still down $8.1 trillion from the peak. In addition, the value of real-estate holdings fell 2.4 % in 1Q09.

U.S. homeowners’ equity came in at 41.4% for 1Q09, down from 42.9% 4Q08, and represents the lowest level since 1945. The closely observed the Case-Shiller National Home Price Index exhibited about a 7.5% decline during 1Q09, with a total decline of 32.2% since the 2Q06 peak.

To be fair, there are some positives of late - retail sales increased 0.5% in May 2009 (following two consecutive months of declines), the number of newly unemployed workers filing for benefits last week continued to moderate to 601,000 - the lowest level since late January 2009 - and the Federal Reserve Chairman Ben Bernanke as well as other economists expect the recession to end this year with consumer spending continuing, albeit subdued.

With the decline in net wealth, the rise in overall unemployment remaining extremely elevated (as benefits have been extended), and U.S. consumers moderating spending at a 4.3% annualized rate (the most significant reduction since 1981), it begs the question - if our economy’s lifeblood, the consumer, were to feel less certain about the future and reduce spending again, would a potential recovery this year be put off for several addition quarters?

In addition, if foreclosures continue to rise (now with high-quality loans becoming delinquent) and consumers expand their delinquencies on their credit cards even further, could there be an additional delay in the expected recovery? Moreover, what would the results be for entities such as, but not limited to, Citigroup (C), Bank of America (BAC), Wells Fargo (WFC), Capital One (COF) and US Bancorp (USB).

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