WSJ -- Household Net Worth Drops by 4.5%
Remember -- we're all gonna get rich by purchasing real estate (today), because everyone is feeling so wealthy, and there is just so much money sloshing around to bid up real estate even higher ...
Jon.
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December 6, 2002
Pocketbooks May Close Soon As Net Worth Drops by 4.5%
By GREG IP
Staff Reporter of THE WALL STREET JOURNAL
WASHINGTON -- Household wealth has fallen to its
lowest level since 1995, suggesting consumers may
have to rein in their free-spending ways to rebuild their
balance sheets.
Household net worth fell 4.5% from the second quarter
to $38 trillion, the Federal Reserve reported Thursday.
The ratio of net worth to disposable personal income, a
widely watched indicator of household wealth, sank to
a seven-year low of 4.9 in the third quarter from 5.2 in
the second quarter, well off the record 6.3 at the end of
1999.
The drop in net worth resulted from shrinking assets
and rising debt. Assets fell 3.4% to $47 trillion, mostly
due to a 17% plunge in the value of households' stock
and mutual-fund holdings to $6.5 trillion. (Stocks have
since recovered about half their third-quarter drop.)
Liabilities rose 2.2% to $8.5 trillion, mostly due to
mortgage debt, which rose 3.3%, the highest rate since
1989, to $5.8 trillion.
Just as the late 1990s bull market enabled affluent
households to boost spending and reduce savings, the
drop in wealth since is doing the reverse, said Srinivas
Thiruvadanthai, research director at the Jerome Levy
Forecasting Center in Mount Kisco, N.Y.
"The wealth effect works with some lags," he said. "Consumers have not fully responded to declines [in
wealth] in the first three quarters of the year. Even though the stock market has recovered a bit in the fourth
quarter, savings rates will rise. That means consumption will be weak, or even fall."
Others were more sanguine. Martin Barnes, editor of the Bank Credit Analyst, a Montreal-based forecasting
publication, noted the ratio of net worth to income has simply returned to its long-term average. "I don't think
at its peak, people somehow had built that level of net worth into all their decisions and spending patterns.
Spending hasn't departed that much from underlying core growth in incomes."
Indeed, average net worth per household stood at $352,000 at the end of September, down from its early 2000
peak of $412,000 but still higher than at any time before 1998. The figure is heavily skewed by relatively few
very wealthy individuals.
Federal Reserve Chairman Alan Greenspan has attributed the consumer's ability to keep spending -- despite a
massive loss of stock wealth -- to rising home values. As home prices have risen and mortgage rates fallen,
millions of homeowners have "cashed out" some of the equity in their homes and spent the proceeds. Indeed,
if holiday sales are robust this year, it likely will be due in large part to the massive wave of mortgage
refinancing triggered by the drop in mortgage rates to record lows in October.
But Bill Dudley, director of U.S. economic research at Goldman Sachs, said mortgage debt can't keep rising at
its recent pace. He said the economy can't be both strong enough to push home prices up further, and weak
enough to pull mortgage rates down more. "Mortgage refinancing is probably going to decline rather than
decrease from here. That will remove an important source of support for consumer spending."
Still, the high levels of debt on their own are unlikely to hurt spending. That is because low interest rates have
kept the cost of servicing that debt relatively low. Mr. Barnes said much of the rise in debt results not from
existing homeowners getting further in hock, but from other families buying homes for the first time, and thus
substituting a mortgage payment for what had been a higher monthly rent. "Push the economy into recession,
and, sure, you'll have problems," he said. "But debt itself won't cause recession."
Indeed, signs of a firming labor market suggest consumers shouldn't have any problem paying their debts. The
Labor Department said Thursday that the number of Americans filing first-time applications for unemployment
benefits decreased 13,000 to 355,000 last week, the lowest in more than 21 months, though a Labor
Department spokesman said Thanksgiving week may have distorted the figures somewhat. The less-volatile
four-week average of initial jobless claims fell 10,500 to 376,500, its lowest point since March 2001.
Separately, the Fed revised industrial-production data back to 1972 to incorporate new data and methodology.
The revisions show the recent slip in manufacturing, part of what Mr. Greenspan calls a "soft spot" for the
economy, began in September, instead of August, and has been shallower than previously reported.
The revisions also cast the 1990-91 recession in a new light. They show industrial production peaking in
September 1990, rather than April 1989. Mr. Greenspan had said in a closed-door policy meeting on Oct. 2,
1990, that despite forecasts to the contrary, "the economy has not yet slipped into a recession."
He was later contradicted by the nonprofit National Bureau of Economic Research, which relying in part on the
original industrial-production figures, declared a recession had actually begun that July. Mr. Greenspan can
now claim that, at least as far as industrial activity is concerned, he wasn't that wide of the mark.
Write to Greg Ip at greg.ip@wsj.com
Updated December 6, 2002
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