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The ‘Real’ Truth On Household Net Worth

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    September 30, 2013

    Let’s take a long-term view of household net worth from the latest Flow of Funds report. 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 34.6% above the 2009 trough at a new all-time high 8.4% above the 2007 peak. The nominal Q4 net worth is up 1.8% from the previous quarter and up 11.5% year over year.



    But there are problems with this analysis. Over the six decades of this data series, total net worth has grown about 7159%. 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 5.1% 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 Q2 2013 nominal net worth now is 8.4% above previous peak. The real net worth is 4.5% 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 19.5%. The real decline was 22.0%.
    • Recovery to date: The latest Flow of Funds report shows a nominal recovery of 34.6% off the trough. The real recovery is 22.5%.
    • Quarter-over-quarter: Nominal total net worth in Q2 increased 1.8% from the previous quarter. The real increase was 1.3%.
    • Year-over-Year: Nominal total net worth in Q2 rose 11.5% from Q2 2012. The real increase was 9.9%.

    We’ll take another look at the nominal and real numbers after the release of the Q3 2013 Flow of Funds data in December.

    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 Flow of Funds 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 6.0% of combined household and nonprofit real estate (down from 6.1% 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.

    Images: Flickr (licence attribution)

    About The Author

    My original dshort.com website was launched in February 2005 using a domain name based on my real name, Doug Short. I’m a formerly retired first wave boomer with a Ph.D. in English from Duke. Now my website has been acquired byAdvisor Perspectives, where I have been appointed the Vice President of Research.

    My first career was a faculty position at North Carolina State University, where I achieved the rank of Full Professor in 1983. During the early ’80s I got hooked on academic uses of microcomputers for research and instruction. In 1983, I co-directed the Sixth International Conference on Computers and the Humanities. An IBM executive who attended the conference made me a job offer I couldn’t refuse.

    Thus began my new career as a Higher Education Consultant for IBM — an ambassador for Information Technology to major universities around the country. After 12 years with Big Blue, I grew tired of the constant travel and left for a series of IT management positions in the Research Triangle area of North Carolina. I concluded my IT career managing the group responsible for email and research databases at GlaxoSmithKline until my retirement in 2006.

    Contrary to what many visitors assume based on my last name, I’m not a bearish short seller. It’s true that some of my content has been a bit pessimistic in recent years. But I believe this is a result of economic realities and not a personal bias. For the record, my efforts to educate others about bear markets date from November 2007, as this Motley Fool article attests.


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