Household net worth falls for the first time in 55 years:
interactive.wsj.com
March 13, 2001
Household Net Worth Declines 2%
As More Assets Are Tied to Stocks
By GREG IP
Staff Reporter of THE WALL STREET JOURNAL
<<WASHINGTON -- Falling stock prices caused household net worth to
decline last year for the first time in at least 55 years, posing a major
obstacle to the economy recovering its previous robust pace.
Household net worth -- total assets such as houses and stocks, minus total
liabilities such as mortgages and credit-card debts -- declined 2% to $41.4
trillion at the end of 2000 from $42.3 trillion at the end of 1999, according
to the Federal Reserve Board's "flow of funds" report released Friday.
While not big in percentage terms, the decline stands out as the first since
available data begin in 1945 and could serve as a significant drag on
consumer spending, especially since stock values have continued to fall
since the end of 2000.
Paddy Jilek, director of U.S. economics at Credit Suisse First Boston, said
consumers will spend less and save more to rebuild eroded wealth, and
that could "take quite a while to work through."
Jan Hatzius, senior economist at Goldman Sachs, said that without a stock
rebound, the economy faces the "biggest pent-up negative wealth effect
that you can see in the economic data going back to 1952."
The drop in net worth, including a minor amount attributable to nonprofit
organizations, was almost entirely because of plunging stock values. The
value of direct household stock holdings sank to $6.6 trillion from $8.75
trillion, and the value of household mutual-fund holdings declined to $3
trillion from $3.1 trillion, though some of that could be due to sale of stock,
not just falling stock prices. By contrast, the value of household real estate
rose to $11 trillion from $10 trillion.
Even as their assets' values were being hammered by falling stocks,
households kept borrowing heavily. Total liabilities rose to $7.6 trillion
from $7 trillion, with most of the rise coming in mortgages.
Still, household net worth remains high by historical standards. At the end
of 2000 it was still 12% above where it stood at the end of 1998. And it
was still equivalent to 585% of personal disposable income, down from
624% a year earlier but well above the 477% figure it stood at in 1994.
Although stocks have fallen more in percentage terms before, they now
represent a larger share of household assets than their historic average,
thus their recent decline is having a bigger effect on total net worth than
similar drops in the past.
Goldman's Mr. Hatzius said the ratio of household net worth to personal
disposable income fell more sharply in 1968 to 1970 and in 1972 to 1974,
both periods of protracted bear markets in stocks. Based on those
episodes, he predicts the savings rate will start to rise, depressing
spending.
Credit Suisse First Boston's Mr. Jilek said the economy faces both a
short-term "inventory" problem as companies cut production to use up
excess stocks, and a balance-sheet problem. He predicted the inventory
problem will have been dealt with by the middle of this year, but it may be
well into next year before the economy has overcome the balance-sheet
problem of households adjusting to their lower levels of wealth.
Falling stocks also can hurt consumer confidence, affecting spending in the
short run.>> |
