The Wilder View

Record wealth loss in 2008; saving rises

Yesterday the Federal Reserve released the fourth quarter flow of funds report. This is a massive report with stock and flow data across all sectors of the U.S. economy, including households, businesses (financial and nonfinancial), and government. First, let’s look at the headline: the household. From Bloomberg:U.S. household wealth fell by a record $5.1 trillion from October to December, almost twice the decrease in the previous quarter, as home values and stock prices plunged, Federal Reserve figures showed.Net worth for households and non-profit groups decreased to $51.5 trillion, the lowest level in four years, from $56.6 trillion in the third quarter, according to the Fed’s quarterly Flow of Funds report yesterday. Wealth dropped $11.2 trillion in 2008 from the year before, the biggest annual decline since the government began keeping quarterly records in 1952.


The chart illustrates annual growth in net worth (quarter over quarter from year ago) since 1952, which clearly illustrates Bloomberg’s record – biggest annual decline since 1952, -14.5%. It should probably be noted that Q1 (first quarter), Q2, and Q3 of 2008 also broke that same record, so wealth really posted its biggest annual decline since Q3 2008.

Since its peak in Q2 (second quarter) of 2007, $64.4 trillion, household (and nonprofit organizations) net worth has declined 20%, or $12.9 trillion. This is massive wealth destruction, and probably the biggest catalyst to the recent surge in personal saving.


The scatter plot relates the ratio of net-worth (wealth) to disposable income, measure of the wealth effect, and the level of personal saving since 1980. There has been a fairly strong and negative relationship between wealth and saving, suggesting that the recent destruction in household wealth has caused consumers to increase saving (i.e., reducing consumption). And furthermore, the level of saving will probably rise until equity and house prices stabilize.

The wealth effects on consumption were strong in 2008. Clearly, there are other factors here that affect personal saving; but nevertheless, the destruction of wealth is probably a dominant force dragging down real consumption for two consecutive quarters (Q3 and Q4, see Table 8 on the personal income report).

Originally published at the News N Economics blog and reproduced here with the author’s permission.


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