So much for the recovery. It’s more like a recession holding pattern.
American households have rebuilt less than half of the wealth lost during the recession, according to a new analysis from the Federal Reserve, hampering the country’s economic recovery.
The research from the St. Louis Fed shows that households had accumulated net worth totaling $66 trillion at the end of last year. After adjusting for inflation and population growth, the bank found that meant families on average have only made up 45 percent of the decline in their net worth since the peak of the boom in 2007.
In addition, most of the improvement was due to gains in the stock market, according to the report, primarily benefiting wealthy families. That means the recovery for most households was even weaker.
“A conclusion that the financial damage of the crisis and recession largely has been repaired is not justified,” the report stated.
Household wealth is also an important component of the recovery. The Fed is spending $85 billion a month to lower long-term interest rates and stimulate the economy. Top officials, including Chairman Ben S. Bernanke, have pointed to the rebound in real estate and the soaring stock market as evidence of the easing program’s success. They say those factors should create a “wealth effect” that lifts consumer sentiment and, eventually, spending power.
But the report from the St. Louis Fed cites analysis by noted economists Karl Case, John Quigley and Robert Shiller that found the wealth effect was more powerful on the way down than on the way up. An unexpected 1 percent drop in housing prices caused a permanent 0.1 percent decrease in spending, that study found. But a similar 1 percent rise in housing prices boosted consumer spending by only 0.03 percent.
So much for the strategy of going bankrupt to boost a little temporary borrowing and spending.