Economic realities and short-term prospects are bad in the US. You hear it everywhere, from the media to your next door neighbor. Growth is flat, unemployment is high, and the housing market has crashed with presumably still some downward space to go. But beyond the media hype, how bad are things? Fundamentally? and how does it compare with previous recessions? I wanted to shed some light on this matter using a single, uncomplicated economic measure with a long enough time-series to cover at least the last 50 years. The simple yet powerful concept of net worth came to mind.
Net worth is simply what’s left on someone’s balance sheet after you deduct all your liabilities from your assets. What you have minus what you owe. It’s a core measure of solvency, used mostly in financial sector economics (banks capital), but also in any kind of balance sheet analysis involving assets and liabilities. I wanted to analyze the combined net worth of US households over the last 50 years, and see where we stand. Luckily, the readily-available and infinitely useful flow of funds datafrom the Federal Reserve provide a nice historical quarterly time-series of the US households’ balance sheet positions. Below is a quick visualization I made using that data.
One line traces the evolution of combined households net worth in USD billions, and the other shows a share of net worth over total assets, the higher the number the better for both indicators.
The viz shows a steady increase in net worth from the early 50′s to 2007, except for a hiccup related to the dot.com bust of the first few years of the 21st century. Then came 2008 and everything came crashing with armageddon-like ferocity.
The evolution of the share of net worth over assets, which can be considered as a measure of “soundness” of net worth, has similarly gone through the dot.com and 2008 turbulence, but has on the other hand been on a slow but steady erosion since the early 50′s.
So far so good, except that, before crunching the numbers, I was expecting to see a particular trend post-2008, particularly one of declining net worth and declining share of net worth to assets among US households, to go with the gloomy stream of economic news and market sentiment of the past few years. Instead, the numbers show a rather strong rebound in both indicators, starting from early 2009. Low and behold, things are not so desperate after all if you were to trust the fundamental information derived from the flow of funds data. How could that be? One simple explanation, also provided by the flow of funds sectoral balance sheet data of the US economy, is that Americans have taken extra care post-2008 to reduce their credit card debt (liabilities) and increase their savings deposits (assets), hence improving their net worth. While aggregate consumption ( and hence growth) has been the main victim of this balance sheet cleanup, things are looking better fundamentally for american households.
Caveats. Along with the level of net worth, one has to also look at the distribution: We already know from census data that the rich are getting richer and skewing the averages. Equally important is a look at earning power and disposable income: unlike net worth (a solvency concept), earning power is an income statement concept, or a “liquidity” concept. It is indeed more palpable than the net worth concept. So granted, households net worth is only one part of the economic picture, but it’s a fundamental one with long-term implications.
It is hard to convince someone who has lost their job or saw the value of the house they live in slashed in half that things are looking brighter. The alternative is trusting the media. I’d rather trust the hard numbers.