Household Net Worth and Economic Performance

Household net worth, the value of all financial and nonfinancial assets net of all debt held by households and nonprofit organizations, reached an all-time high of $168.8 trillion in 2023Q3 (Chart 1). While GDP and its components that describe the flows of national expenditures and income receive the most attention from economic commentators and financial markets, the quarterly household net worth data collected and published by the Federal Reserve Board and Haver Analytics are nevertheless important. They are both a reflection of economic performance and a significant contributor to it.

Consistent with its typically accentuated cyclical pattern, in the last two years household net worth has risen $25.5 trillion, or 18.8%, while nominal GDP has risen 11.8%. The value of assets has risen 16.4% while liabilities have risen 6.1% (Chart 2). Household net worth is now 7.8 times higher than disposable personal income, up from a low of 5.6 times following the Great Financial Crisis in 2010 (Chart 3). Of the total assets, $128.7 trillion is financial wealth that includes stocks and bond holdings, private equity and pensions, while nonfinancial assets, primarily real estate, are $61.3 trillion. Household holdings of real estate net of outstanding mortgages is $35 trillion (Chart 4).

The two-year surge in wealth followed the 23.7% decline in the first three quarters of 2022 when the value of stocks and bonds and private equities fell as the Fed raised interest rates and bond yields soared. The subsequent rebound in wealth as the Fed has eased rates a bit and bond yields remain several percentage points above inflationary expectations has been striking.

The distribution of wealth. Not surprisingly, data provided by the Fed’s quarterly report on household net worth and the U.S. Census Bureau indicate that the distribution of household net worth is very unevenly distributed, but the large majority of cohorts of households have benefited and a relatively large number of households have accumulated a lot of wealth. The Fed’s Household Net Worth data show that of the 133 million households in the U.S., the top 1% (1.33 million) hold 30.8% of total household net worth and the 90th-99th percentile of households (12 million households) hold 36% of the total wealth, the 50th-90th percentile (53.2 million households) holds 30.3% of the wealth and the lower half of households hold 2.4% of wealth.

The U.S. Census Bureau’s Survey of Income and Program Participation (SIPP) Report provides wealth data on households in specific percentiles of all households for 2022. The median household had $176,500 in net wealth, the 75th percentile household had $614,700 and the 90th percentile household had $1,603,000 in net wealth. Based on the recent 2-year rise in household net worth and 133 million households, that means approximately 13.3 million households have net wealth above $1.9 million, and roughly 20 million households have net worth above $1 million. Presumably, for many households, a sizable portion of their net wealth is the value of their home, but the data show sizable increases in financial assets as well.

Economic impacts. The rise in household net worth has had a material impact on the economy, boosting consumption, business investment and domestic demand. While the primary factor driving consumption is real (inflation-adjusted) disposable personal income that is determined by employment and wages, the sharp persistent rise in wealth has contributed to the resilience of the consumer. This wealth-induced rise in the propensity to spend is reflected in the relatively low rate of personal saving in 2023-2024 which is several percentage points below the post-GFC period when the sharp decline in household led households to spend less and increase saving to replenish their depleted balance sheets (Chart 5).

Besides the wealth effect on consumption, the rise in wealth flows into the economy and affects economic performance in numerous ways. The appreciation of real estate and financial assets has provided privately owned businesses the impetus and financial ability to expand, increase their capital expenditures and hiring. This impact on small businesses is important, as 77% of all employment is in privately-owned firms, and 45% of all employment is in firms with less than 250 workers. The opposite was true following the GFC when the sharp collapse in real estate undercut small business financing.

Charitable giving, which totaled $550 billion in 2023, flows directly into the economy, providing financial support for the operations and activities of non-profit organizations. Gifting of household wealth is sizable. Consider that 31.6% of all household net worth is held by people 70 years old and older, and 42% is held by people aged 55-69. Parents gift large sums to their children for down payments for home purchases, to pay for grandchildren education and a wide array of other activities. Many make infra-family loans to family members. Currently, assets in IRA and Keough accounts total $14.5 trillion, and required minimum distributions (RMDs) after-tax are direct additions to measured disposable income.

Economic policy implications. Material declines in household net worth can have the opposite effect of dampening economic activity. Economic policymakers, in the U.S. and overseas, have occasionally ignored the sources and impacts of sizable changes in household net worth, contributing to misguided policies. The sharp decline in U.S. household net worth during the GFC—its peak-to-trough fall of 16.4% reflected steep declines in the S&P500 and the Case Shiller Home Price Index—constrained the recovery of consumption and the economy, despite the Fed’s sustained zero interest rates and massive quantitative easing along with the fiscal stimulus of the Economic Recovery and Reinvestment Act of 2009. The failure of aggressive monetary and fiscal stimulus to lift aggregate demand resulted in a soft recovery and low inflation. This had a lasting impression on policymakers. Fueled by its belief that policy responses to the GFC were too timid, fiscal policymakers shifted toward hyper-stimulus in response to the pandemic, while the Fed incorrectly presumed that inflation would stay low like it did following the GFC, which contributed to its poor forecast and decision to maintain excessively easy monetary far too long, a costly mistake that still has lingering effects.

Decades earlier, Japan’s asset price bubble in the late 1980s that resulted from the Bank of Japan’s excessively easy monetary policies burst, and the resulting 75% collapse in real estate values and the Nikkei generated a massive loss in wealth and capital. The Japanese government failed to acknowledge the problem, providing insufficient fiscal stimulus to offset the hit to wealth and delayed recapitalizing the severely damaged commercial banks until 1997. As a result, the negative wealth effect resulted in insufficient aggregate domestic demand, bouts of mild deflation and a “lost decade”.

China’s recent collapse of its government-generated excesses in real estate have generated dramatic losses in wealth, widespread bankruptcies of major land developers and undercut local government finances that relied heavily on revenues from land sales. Real estate had been the dominate portion of total household net worth in China—its share was more than double the U.S.’s 33% share—and its negative impacts on consumption and domestic demand have been quite severe. The Chinese government has acknowledged and tried to the problem, but its government debt has soared, which has constrained the amount of stimulus it has provided. To date the housing market continues to have excess supply, and cautious consumers tilt toward saving rather than spending.

The experiences of the U.S., Japan and China highlight the importance of sizable shifts in household net worth and suggest policy makers need to gain a better understanding of the sources and economic consequences of sizable shifts in wealth.