American household wealth has hit a new record high. Recent data suggests that the net worth of U.S. households and non-profit organizations rose 14% or about $10 trillion to $80.7 trillion which is even greater than the pre-recession high of $76.6 trillion. Household net worth is calculated by aggregating the value of homes, stocks, and other assets after accounting for debts and liabilities. These numbers run contrary and show a marked improvement to the bleak future that was projected during the recession.
However much of this wealth is lopsided as it is going to the already affluent. In spite of the increase in wealth, there is not much consumer spending, suggesting that there is an increasing gap in wealth inequality. Much of this increase in the net worth was from the capital markets as the equity markets saw steep gains with S&P 500 index reaching 30% last year. This led to the weight of stocks and bonds as a percentage of total net worth to increase to 35%, a figure that has not reached such heights since the dot com bubble. Since the wealthy are more likely to invest in the stock-market, they benefitted from these gains and so stock market and mutual fund investments saw an aggregate increase of $5.6 trillion. Middle-class Americans on the other hand, whose largest investment are in residential real estate, only saw gains of about $2.3 trillion.
The data also suggests that households are decreasing their debt burdens, borrowing only 109% of their disposable income in the fourth quarter compared to 135% in 2007. While debt burdens are decreasing, households did increase their borrowing rate to 0.9% which has been the highest percentage increase since 2007. This is good news as Americans hopefully start to borrow and spend more to stimulate the economy.
In light of recent positive market reports and indicators as well as an increase in total American wealth, I believe that economic recovery seems to be in progress, but until middle-class Americans gain a larger share of the wealth and feel more comfortable borrowing and spending, the economy will be slow to pick up the pace on the recovery.
- Roshan J. Panicker