American household wealth still below 2006 levels

American household wealth is still below levels enjoyed before the Great Recession; 14% below the last peak in 2006, in spite of an optimistic report from the Federal Reserve last summer.

According to a group of economists at The Ohio State University, the fall in American household wealth hit middle-aged individuals the most.

The study, titled “US household real net worth through the Great Recession and beyond: Have we recovered?”, has been published in the February issue of Economic Letters.

American household wealth is not higher than ever

The researchers contradict a Fed report which said that household wealth in the US in nominal terms is higher than it has ever been, i.e. since records began in 1945.

Randy Olsen, co-author says the Fed’s analysis included four data issues that gave a considerable boost to its optimistic interpretation of the economy.

Olsen explains that the Fed’s data had four problems:

  • It did not make adjustments for population growth.
  • It did not make adjustments for inflation.
  • It included accounts held my non-Americans who lived abroad.
  • It did not include just wealth held by households, but also by nonprofits.

Olsen said:

“All four of these issues with the Fed report pointed in the same direction, leading toward a conclusion that was far rosier than what exists in the real world.”

Olsen and co-author Lucia Dunn gathered and analyzed data from the Consumer Finance Monthly (CFM), a telephone survey of American households conducted monthly from 2005 to 2013 by Ohio State’s Center for human Resource Research (CHRR), of which Olsen is director.

The CFM data is not distorted by the four issues associated with the Fed report, the researchers say. To date, over 25,000 households have been surveyed on the debts and assets.

Olsen said:

“The CFM dataset fills in some key gaps in the history of the Great Recession and allows us to have a much clearer picture of what happened to American households during this economic downturn.”

The study found that American household wealth, i.e. the mean real net worth of American households, peaked in 2006 at $398,620. It fell to $217,687 at the bottom of the recession in 2009, and recovered somewhat to $333,859 in 2012, but was still 16% less than the pre-recession peak.

After some further improvements in 2013, American household wealth last year managed to be 14% below the high of 2006.

Socioeconomic groups affected differently

Young and less wealthy people lost more during the Great Recession in percentage terms than the rest of the population, but they also made a greater recovery since then.

The poorest 25% of US households had essentially recovered the wealth they had lost during the recession by 2012. Olsen says it is because they had very little to lose and recover.

Olsen explained:

“Many may have already lost their homes and had their credit cards taken away. If they can’t borrow, they can’t go into debt. Some may have paid off their old car loans, which gives them a small asset.”

Households at the 75th and 90th percentile in net worth terms were still 19% and 23% respectively below their 2006 levels of wealth in 2012.

Young people recovered the best from the recession. People under the age of 35 years were 4% below their household net worth in 2012 compared to 2006, while individuals over 55 were 13% below.

Americans aged between 35 and 54 were the worst hit; their net worth was 27% below 2006 levels in 2012.

Olsen said:

“What we’re seeing in these middle-aged people is very disheartening, because they are in what should be their peak earning years, when they should be accumulating assets before retirement.”

“We might be seeing people who have lost their jobs and are forced to spend their assets because they can’t find work. Some of them may have given up looking.”

Fed bond-buying stimulus program boosted value of financial assets

Much of people’s recovery regarding their net worth since the Great Recession has been attributed to the increase in value of their financial assets, such as stocks, which favors people who are already wealthy, the researchers noted.

The increase in people’s financial assets has occurred because of the Fed’s policy of quantitative easing which boosted the prices of longer-term bonds and other financial assets.

“Without quantitative easing, we probably would show even lower levels of household net worth,” Olsen said. “As much as the Federal Reserve might want people to believe we have recovered from the recession, the bottom line is that we haven’t.”