Household wealth in the United States grew by $2 trillion in the second quarter, according to the Federal Reserve.
That’s the first gain in household wealth since the third quarter of 2007 at the start of this recession and stock market slide, and brings to an end the longest wealth slump on record.
Now we’ll find out if the wealth effect is still in operation.
You remember the “wealth effect” don’t you? It was an explanation during the recent boom and the one before that for how the economy could grow so fast even as incomes stagnated. The idea was that people had more wealth–in the form of stock portfolios, retirement accounts, houses, and other assets–so they felt able to spend more. Even if that meant going into debt to do it because they couldn’t get at those increasingly valuable assets in order to turn them into cash.
Economists have posited a kind of reverse wealth effect during recession: people who have suffered losses in the stock or housing market pull back on spending, the theory goes. It’s been kind of hard to test, though, since in this recession so many people have been spending less because they’ve not just lost wealth on paper but their jobs as well.
It might be easier to test the wealth effect on the upside right now. Unemployment is still rising–9.7% at last official count and on its way to breaking 10%–but the stock market rally has made a lot of people much wealthier very quickly.
The $2 trillion gain in household wealth in the quarter is a result of thbe biggest one-quarter jump in stock prices since 1998.
The gain also reflects a drop in consumer debt as some households pay off credit cards and an increase in savings as some households put more money away for a rainy day (or the next stock market bust.)
As heartening as an increase in national household wealth may be it also reflects the disparity between those who have kept their jobs, been able to pay down debt, and profit from the stock market advance and those who have lost jobs and are struggling to hold onto their homes.
Recent credit card data has made the same point. Consumers who can are paying down balances so the total we owe nationally has fallen every month since February. On the other hand, credit card default rates are rising as well as those who have lost income fall behind on their payments.