Thursday, March 8, 2018

Household net worth hits $100 trillion

Today the Fed released its quarterly estimate of household net worth. Things just keep getting better and better. Household net worth as of the end of last year was almost $99 trillion, having risen $7.1 trillion over the past year (+7.8%). As in recent years, gains have come mostly from financial assets (up $27.6 trillion since late 2007), plus real estate (up $2.8 trillion since the pre-Recession peak of 2006), offset by only a $1 trillion increase in debt (total liabilities rose from a Recession peak of $14.6 trillion in 2008 to $15.6 trillion at the end of 2017). Further details in the charts below:

Chart #1

Chart #1 summarizes the evolution of household net worth.

Chart #2

Chart #2 shows the long-term trend of real net worth, which has risen on average by about 3.5% per year over the past 65 years. I note also that recent levels of net worth do not appear to have diverged at all from long-term trends. That wasn't the case in 2007 however, when stocks were in what we now know was a valuation "bubble."

Chart #3

Chart #3 shows real net worth per capita. The average person in the U.S. today is worth just over $300,000, and that figure has been increasing by about 2.3% per year for the past 67 years. Regardless of who owns the country's wealth, everyone benefits from the infrastructure, the equipment, the computers, the offices, the homes, the factories, the research facilities, the workers, the teachers, the families, and the brains that sit in homes and offices all over the country and arrange the affairs of the nation so as to produce almost $20 trillion of income per year.

Chart #4

Chart #4 shows that households have been extremely prudent in managing their financial affairs since the Great Recession. Household leverage (total debt as a % of total assets) has declined by one-third since its Q1/09 high. Leverage is now back to the levels which prevailed during the boom times of the mid-80s and 90s. Unfortunately, while households were busy strengthening their finances, the federal government was doing just the opposite: the burden of federal debt more than doubled from June '08 to December '17 (i.e., federal debt owed to the public rose from 35% of GDP to 75% of GDP).


Andrew Ross said...

Maybe I'm just tired from a long day of work.

If household net worth is growing faster than per capita, then doesn't that imply that households are getting smaller?

2.3% - 3.5% = -1.2%

However, there are statistics around showing relatively stable household sizes.

Size Year Ratio Years Rate
2.54 2017 1 0 ----
2.56 2007 0.9921875 10 0.1%
2.64 1997 0.962121212 20 0.2%
2.66 1987 0.954887218 30 0.2%
2.86 1977 0.888111888 40 0.3%
3.14 1970 0.808917197 47 0.5%

Andrew Ross said...

Sorry about the formatting.

My math shows household shrinking by the following rates:

Last 10 years -0.08% annually
Last 20 years -0.19% annually
Last 30 years -0.15% annually
Last 40 years -0.30% annually
Last 47 years -0.45% annually

Scott Grannis said...

Andrew: I think you are over-analyzing things. Household net worth measures the total net worth of everyone in the country: all the households, regardless of size. My numbers say nothing about household size. Total net worth grows faster than Per Capita because population is increasing a little over 1% per year.

Cameron Khajavi said...

Scott - The pessimistic crowd would argue that simply excluding the top 1 percent would massively skew the numbers here and paint a much less optimistic picture for the average American - excluding the top ten percent would make another step function down for the average - so debt to income and net worth adjusted would suggest less spending power than these numbers would suggest - curious if you have a retort?

Scott Grannis said...

Cameron: Excluding the top 1% or 10% would reduce total wealth and per capital wealth by a meaningful fashion, but it’s anyone’s guess by how much. Regardless, I would argue that an exercise such as this would only stoke the fires of envy. Living standards and quality of life are a function not so much of one’s income as of one’s country. The living standards of a country depend heavily on the overall wealth of the country, because that wealth is a by product of each country’s customs, laws, freedoms, and social and and economic stability. A billionaire in Zimbabwe would find it hard to enjoy the same comforts as a middle class person anywhere in the US. Can a multi-billionaire live a more satisfying and comfortable life than a multi-multi-millionaire? The most important ingredient is not one’s income or wealth but one’s surroundings, one’s job opportunities, one’s infrastructure, etc.

A wealthy country, a country with tons of capital, is a country where labor is well compensated. There are two fundamental ingredients in any economy: labor and capital. If you have an abundance of one, you necessarily have a shortage of the other. A country chock full of capital (ie, tons of rich people) is a country where labor is well-compensated, because there is a relative shortage of labor. Go to Bermuda, one of the countries with the highest income per capital, and you cannot find anyone who is poor or who cannot find a well-paying job. The shortage of labor is so acute that the island needs to import workers to man its hotels and restaurants. A country with little capital is a country with an abundance of poorly-paid workers. Lots of examples, especially Venezuela, where capital has fled because it is exploited.

Everyone in the US benefits from the fruits of the enormous amount of capital that has been invested and which resides in this country. It matters little who owns the buildings we work in. What matters is that we have lots of buildings, lots of jobs, lots of infrastructure, and lots of opportunities that only our massive wealth can provide.

Jason said...

Curious if this data takes into account inflation or not?

Scott Grannis said...

Jason: Charts #2 and #3 are adjusted for inflation.