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The coming depression blog | July 30, 2014

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Household Net Worth: The “Real” Story

Note from dshort: With today’s release of the Fed Flow of Funds for Q4 2011, I have updated this commentary to reflect the latest data.

A quick glance at the complete quarterly data series in linear chart suggests a bubble in net worth that peaked in Q2 2007 with a trough in Q1 2009, the same quarter that the markets bottomed. The latest Fed balance sheet shows a total net worth that is 15.9% above the 2009 trough but still 12.5% below the 2007 peak. The positive news in the Q4 balance sheet is that real total net worth has increased 2.1% from Q3 of 2011, although the year-over-year number is a fractional decline of 0.6%.

But there are problems with this analysis. Over the six decades of this data series, total net worth has grown by 5000%. A linear vertical scale on the chart above is misleading in its failure 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 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 5000%, the value of the 1951 dollar shrank to about 10.5 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.

Let’s now zoom in for a closer look at the period since 1980. I’ve added some callouts to highlight where we are currently with regard to the all-time peak and 2009 trough.

So now let’s compare the nominal and real statistics for the peak-to-trough and recovery-to-date.

  • Peak: The nominal peak occurred in Q2 2007; the real peak occurred in Q1 2007.
  • Trough: The nominal and real troughs occurred in Q1 2009. The nominal peak-to-trough decline was 24.5%. The real decline was 26.7%.
  • Recovery to date: The latest Flow of Funds report shows a nominal recovery of 15.9% off the trough. The real recovery is 8.6%.
  • Quarter-over-quarter: Nominal total net worth in Q4 increased 2.1% from Q3. The real increase was 2.2%.
  • Year-over-Year: Nominal total net worth in Q4 declined 0.6% from Q3. The real decline was 3.8%.
  • We’ll take another look at the nominal and real numbers after the release of the Q1 Flow of Funds data on June 7th.

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 hold 6.2% of combined household and nonprofit real estate. That percentage in the quarterly data has ranged from a high of 9.2% in 1974 to a low of 4.0% in Q4 2004, a few of quarters before the peak in the residential real estate bubble.

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