FEBRUARY 2004

Household Wealth Rebounds

A year ago in this column we wrote that “uncertainty is the enemy of growth,” and so it apparently was. The looming conflict with Iraq was depressing expectations, holding down stock prices, and discouraging business investment. Otherwise, fundamentals for a strong recovery were in place. As Federal Reserve Chairman Alan Greenspan predicted in February 2003, a speedy resolution of the uncertainty associated with military action would remove those impediments to growth. This forecast proved to be right on the money.

We know that overall growth surged in the second half of 2003. Now we see from newly released Federal Reserve data that American household wealth has rebounded almost to the historic high that it reached when the stock market peaked early in 2000. A rebound in equity prices that began in March 2003, coupled with rising home prices, propelled U.S. household net worth to $42.1 trillion by the end of the third quarter of 2003. Given that stock prices rose an additional 12% in the fourth quarter, household net worth probably reached $43 trillion by the end of 2003, not far below the record of $43.6 trillion reached in the first quarter of 2000. Net worth has jumped $3.5 trillion since the cyclical low reached in September 2002, with 43% of the increase attributed to rising value of stocks and mutual fund holdings, 8% due to rising home equity, and the remainder due to larger holdings of bank deposits, pensions and other financial assets. Household net worth is defined as the value of all household assets (stocks, mutual funds, pension savings, deposits, ownership of small businesses) minus liabilities (mortgages and other consumer debt).

Chris Varvares, president of Macroeconomic Advisers LLC (St. Louis, MO), told the Wall Street Journal that rising net worth was a strong contributor to growth last year, and will likely continue to provide stimulus in 2004. Their models indicate that “if the stock market had stayed at its level last March, instead of rallying 47% from pre-Iraq war lows, consumer spending would have grown just 2.8% last year, instead of its actual 3.7%.