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Household Net Worth in U.S. Increases by $2 Trillion (Update2)

By Bob Willis

Sept. 17 (Bloomberg) -- Household wealth in the U.S. increased by $2 trillion in the second quarter, bringing an end to the biggest slump on record.

Net worth for households and non-profit groups climbed to $53.1 trillion from $51.1 trillion in the first quarter, marking the first gain since the third quarter of 2007, according to the Federal Reserve’s Flow of Funds report today in Washington. The government began keeping quarterly records in 1952.

The advance reflected the biggest quarterly jump in stock prices since 1998 and the first increase in home values in more than two years. Together with increased savings and less debt, the gain in wealth is part of the mending process consumers will undergo in coming years before spending can gain speed.

“We’ve clawed back some of the previous losses,” said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts. “Households are less willing to use credit and it will be a long slog to rebuild the wealth” lost during the recession.

Supplemented by federal stimulus measures such as the cash-for-clunkers program, tax credits and extended jobless benefits, consumer spending this quarter has started to improve following the biggest slump since 1980.

Losing Streak

The Standard and Poor’s 500 Index, which showed the biggest quarterly gain since 1998 in the second quarter, has continued to climb since June 30. The gauge was down 0.2 percent at 2:37 p.m. in New York, retreating for just the second time in 10 days.

Retail sales rose 2.7 percent in August, the most in three years, showing unexpected strength that extended beyond auto purchase, figures from the Commerce Department showed this week.

The drop in net worth that ended last quarter began in the last three months of 2007, the longest stretch of decreases since recordkeeping began in 1952. Wealth dropped by a record $13 trillion during that time.

Americans were constrained by plunging home and stock prices, tight credit and rising unemployment. Joblessness is forecast to rise to 10 percent by the end of this year, according to the median estimate of economists surveyed this month by Bloomberg News.

Today’s report showed household net worth in corporate equities and mutual funds increased by $1.36 trillion in the second quarter. Real-estate-related household assets grew by $139 billion, the first gain since the last quarter of 2006.

Less Debt

Americans are taking on less debt to repair their tattered balance sheets, pushing the savings rate up to 6 percent of disposable income in May, the highest level since 1998. While the jump in savings was boosted by an increase in incomes linked to the fiscal stimulus plan, some economists are forecasting savings will continue to rise as consumers hold back on spending.

Owners’ equity as a share of their total real-estate holdings increased to 43.1 percent last quarter from 41.9 percent in the first three months of the year that was the lowest level on record, today’s Fed report showed.

Consumer debt fell at a 1.7 percent annual pace, the fourth consecutive decline.

Mortgage borrowing dropped at a 1.4 percent pace from April through June, while other forms of consumer credit fell at a 6.5 percent rate, the Fed’s report showed.

Total borrowing by consumers, businesses and government agencies increased at an annual rate of 4.9 percent last quarter, led by a 28 percent surge in federal government debt, even as household and business debt fell.

Government Borrowing

Borrowing by the federal government reflected spending linked to the stimulus plan. State and local government borrowing climbed at an 8.3 percent pace.

The economy contracted at a 1 percent rate in the second quarter, matching the decline in consumer spending, after falling 6.4 percent in the first quarter.

Economists surveyed by Bloomberg this month forecast consumer spending to grow at an average 1.3 percent annual pace in the second half of the year. For all of 2009, purchases will drop 0.8 percent, according to the Bloomberg survey.

To contact the report on this story: Bob Willis in Washington bwillis@bloomberg.net

Last Updated: September 17, 2009 14:39 EDT