Household Net Worth: The "Real" Story
Note from dshort: With yesterday's release of the Federal Reserve's Z.1. Financial Accounts of the United States for Q3 2013, I have updated this commentary to incorporate the latest data.
Let's take a long-term view of household net worth from the latest Z.1 release. A quick glance at the complete data series shows a distinct bubble in net worth that peaked in Q4 2007 with a trough in Q1 2009, the same quarter the stock market bottomed. The latest Fed balance sheet shows a total net worth that is 38.7% above the 2009 trough at a new all-time high 11.8% above the 2007 peak. The nominal Q3 net worth is up 2.6% from the previous quarter and up 11.0% year over year.
But there are problems with this analysis. Over the six decades of this data series, total net worth has grown about 7396%. A linear vertical scale on the chart above is misleading because it fails to provide an accurate visual illustration of growth over time. It also gives an exaggerated dimension to the bubble that began in 2002.
But there is another more serious problem, one that has to do with the data itself rather than the method of display. Over the same time frame that net worth grew seven-thousand-plus percent, the value of the 1950 dollar shrank to about nine cents. The Federal Reserve gives us the nominal value of total net worth, which is significantly skewed by money illusion. Here is my own log scale chart adjusted for inflation using the Consumer Price Index.
Here is the same chart with an exponential regression through the data. The regression helps us see the twin wealth bubbles peaking in Q1 2000 and Q1 2007, the Tech and Real Estate bubbles. The trough in real household net worth was in Q1 2009. From that quarter to the latest data point, net worth initially trended at about the same growth rate as the overall regression but has improved over the last four quarters. We are currently 3.4% below the regression.
Let's now zoom in for a closer look at the period since 2000. I've added some callouts to highlight where we are currently with regard to the all-time peak and 2009 trough.
Let's now compare the nominal and real statistics for the peak-to-trough and recovery-to-date.
- Peak: The pre-recession nominal peak occurred in Q3 2007; the real pre-recession peak occurred in Q1 2007. The Q3 2013 nominal net worth now is 11.8% above previous peak. The real net worth is 1.8% below peak.
- Trough: The nominal and real troughs occurred in Q1 2009, the same quarter that the market bottomed. The nominal peak-to-trough decline was 19.4%. The real decline was 21.9%.
- Recovery to date: The latest government report shows a nominal recovery of 38.7% off the trough. The real recovery is 25.7%.
- Quarter-over-quarter: Nominal total net worth in Q3 increased 2.6% from the previous quarter. The real increase was 2.2%.
- Year-over-Year: Nominal total net worth in Q3 rose 11.0% from Q3 2012. The real increase was 9.3%.
We'll take another look at the nominal and real numbers after the release of the Q4 2013 Z.1 report is released on March 6, 2014.
Note: I've referred to this data series as "household" net worth. But, as I show in the chart titles, it also includes the net worth of nonprofit organizations. The ratio of two isn't clearly defined in the Fed data, and it obviously varies by asset and liability component. I've seen estimates that the nonprofit component is around six percent of the total net worth.
One easy (and rather illuminating) point of comparison in the Z.1 data is the relative share of real estate at market value (B.100 lines 3, 4, and 5). In the latest report, nonprofit organizations account for 6.3% of combined household and nonprofit real estate (unchanged from last quarter). That percentage in the quarterly data has ranged from a high of 9.2% in Q4 1974 to a low of 4.5% in Q3 1996.