Monday, July 28, 2014

Household net worth is up, not down

Over the weekend, the New York Times ran an article titled "The Typical Household, Now Worth a Third Less." It cites a study by the Russell Sage Foundation which claims that "The inflation-adjusted net worth for the typical household was $87,992 in 2003. Ten years later, it was only $56,335, or a 36 percent decline." I've since seen this article widely quoted, since its results are nothing less than shocking.

But is the claim true? I very much doubt it.

Consider the dramatic contrast to be found in the household net worth figures compiled by the Federal Reserve, which I have featured here almost every quarter for the past several years. My most recent post on the subject is here, and I highlight the graphs contained in that post below:

According to the Fed's data, total household net worth rose from $49.5 trillion in 2003 to $81.8 trillion as of March, 2014, for a 65% gain. I adjusted that for inflation (using the GDP deflator) and found that in today's dollars, total household net worth rose from $60.9 trillion in 2003 to $81.8 trillion, for a 34% gain. On a per capita basis, real net worth increased from $209.6K in 2003 to $255.7K in 2014, for a 22% gain. 

If per capita net worth in real terms increased 22% from 2003 to 2014, according to the Fed's data, how can the Russell Sage Foundation claim that real net worth for the typical household fell by 36%? Something's very wrong here, and it's not because of the changing number of people in the typical household. My money is on the Fed's data, which are much more comprehensive than the Russell Sage Foundation's data.

Moral of the story: don't believe everything you see in the newspapers. It is almost certainly the case that the typical household's net worth today is substantially more than it was in 2003.


moneytalk88 said...

Hello Scott: I put forwarded a question on the other post, here I refresh it in case you missed it. Your insights are very appreciated! Recently, Yellen stated that the US recovery was not done yet? Does this mean economists have measures to judge when the recovery turn into expansion? If So, what major indicators would show this change? Many thanks! Dennis

Scott Grannis said...

I am unaware of any standard definitions of recovery and expansion. As I see it, most parts of the economy have recovered the losses suffered during the Great Recession, and are moving into new high ground. That includes jobs, real GDP, and nominal GDP. It's been the weakest recovery in modern times, but it is nevertheless a recovery and the economy is clearly in an expansion phase. Yellen apparently wants to see faster progress; that would be nice, of course, but there is only so much that monetary policy can do. I think she is trying to do too much at this point.

moneytalk88 said...

Tks, Scott. I am aware an interesting definition to differentiate these two concepts. Recovery means the economy is still using the existing capacity, while the expansion means the economy is utilizing the additional capacity. This sounds reasonable? In addition, in a typical cycle, expansion follows recovery. I am thinking we may look at nominal GDP

moneytalk88 said...

I realize this cycle is still running with low nominal GDP, so perhaps it is like Yellen state: recovery is not done yet?

Benjamin Cole said...

Scott Grannis: Did the Sage folk measure median net worth while you have measured average net worth?

William said...

Russia bans all Ukrainian dairy imports

A couple of days ago, I wrote that the Ukraine's exports to Russia accounted for 50% of Ukraine's GDP. According to an article in Reuters, it is only 8% of Ukraine's GDP. The same article however did report that Russia banned all imports of dairy products from the Ukraine.

TODAY Russia Eyes Banning U.S. Chicken And Some European Fruit

Scott Grannis said...

Benjamin: I believe the Russell Sage study indeed focused on median household net worth, and my numbers refer to average household and per capita net worth. But I think it is virtually impossible for those differences to account for the huge divergence in results.

The Forbes 400 have a total net worth just over $2 trillion, and that is only 2.5% of total household net worth according to the Fed. The guy at the bottom of the Forbes list is worth a measly $1.3 billion. In other words, the top 0.1% don't account for a very significant portion of total household net worth; therefore their exclusion or inclusion is not going to materially change the calculation of median net worth.

Benjamin Cole said...

Thanks for the reply...great reading as always.

NormanB said...

Scott Grannis:

I don't think it is 'virtually impossible' for the net worth divergences. First, the lower half hardly own any stocks which have contributed much to overall net worth but they do have mortgaged homes which are down, still, by quite a bit. Secondly, the 14% unemployment and the very low participation rate is felt at the lower levels so they have probably dug into whatever assets they have to keep going. Further, the very low consumer sentiment numbers indicate that things aren't going so well.