COLUMBUS, Ohio – Household wealth for Americans still has not recovered from the recession, despite last summer's optimistic report from the U.S. Federal Reserve, a new study suggests.
Economists at The Ohio State University found that the mean net worth of American households in mid-2013 was still about 14 percent below the pre-recession peak in 2006. Their analysis suggested that middle-aged people took the biggest hit.
In a report last June, the Federal Reserve said that net worth of Americans – which includes the value of homes, stocks and other assets minus debts – had essentially recovered since the recession of 2007 to 2009. In fact, the Fed claimed wealth was the highest it had been in nominal terms since records began in 1945.
But the Fed's analysis included four data issues that gave a significant boost to its optimistic reading of the economy, said Randy Olsen, co-author of the study and a professor of economics at Ohio State.
The four problems with the data: It didn't adjust for inflation or population growth; it included accounts held by foreigners living outside of the United States; and it included wealth held by nonprofits and not just households.
"All four of these issues with the Fed report pointed in the same direction, leading toward a conclusion that was far rosier than what exists in the real world," Olsen said.
Olsen conducted the study with Lucia Dunn, also a professor of economics at Ohio State. Their results appear in the February 2014 issue of the journal Economics Letters.
Olsen and Dunn used data from the Consumer Finance Monthly, a monthly telephone survey of U.S. households conducted by Ohio State's Center for Human Resource Research. Olsen is director of CHRR.
The CFM was run monthly from 2005 to 2013 and does not have any of the four issues associated with the Fed report, Olsen said. To date, more than 25,000 households have been surveyed on their assets and debts.
"The CFM dataset fills in some key gaps in the history of the Great Recession and allows us to have a much clearer picture of what happened to American households during this economic downturn," Olsen said.
The results of the new study showed that the mean real net worth of American households peaked in 2006 at $398,620. At the bottom of the recession in 2009, it fell to $217,687. It recovered to $333,859 in 2012, still 16 percent below its pre-recession high. Additional improvements in the first half of 2013 brought household wealth to 14 percent below the 2006 high.
But the recession and the recovery didn't affect all American households the same way. Results showed that less wealthy people and younger people lost more during the recession in percentage terms, but also recovered more since then.
American households in the 25th percentile in terms of net worth (meaning that 75 percent of households had more wealth than they did) had by 2012 essentially recovered the wealth they lost during the recession.
But that is because they had very little to lose and to recover, Olsen said.
"Many may have already lost their homes and had their credit cards taken away," Olsen said. "If they can't borrow, they can't go into debt. Some may have paid off their old car loans, which gives them a small asset."
Meanwhile, those households at the 75th and 90th percentile in terms of net worth were still 19 and 23 percent below their 2006 wealth levels, respectively, in 2012.
As far as age groups go, it was the young who have recovered best from the recession. Those under 35 were 4 percent below their 2006 net worth by 2012. Those over 55 were 13 percent below.
Those who suffered the most were people aged 35 to 54, Olsen said. In 2012, they were 27 percent below their peak net worth recorded in 2006.
"What we're seeing in these middle-aged people is very disheartening, because they are in what should be their peak earning years, when they should be accumulating assets before retirement," he said.
"We might be seeing people who have lost their jobs and are forced to spend their assets because they can't find work. Some of them may have given up looking."
Olsen said much of the recovery in net worth that has occurred since the recession can be attributed to the rise in value of financial assets, such as stocks. This tends to help those who are already wealthy, he noted.
This increase has occurred because of the Federal Reserve's policy of quantitative easing, which means the Fed has bought large amounts of longer-term bonds and other financial assets, boosting their prices.
"Without quantitative easing, we probably would show even lower levels of household net worth," Olsen said.
"As much as the Federal Reserve might want people to believe we have recovered from the recession, the bottom line is that we haven't."
Contact: Randall Olsen, (614) 442-7348; Olsen.6@osu.edu
Written by Jeff Grabmeier, (614) 292-8457; Grabmeier.1@osu.edu
Journal
Economics Letters