Q4 Household Net Worth: The "Real" Story

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1 Q4 Household Net Worth: The "Real" Story March 8, 2019 by Jill Mislinski of Advisor Perspectives Note: With the March release of the Federal Reserve's Z.1. Financial Accounts of the United States for Q4 2018, we have updated this commentary to incorporate the latest data. Let's take a long-term view of household net worth from the latest Z.1 release. A quick glance at the complete data series shows a distinct bubble in net worth that peaked in Q with a trough in Q1 2009, the same quarter the stock market bottomed. The latest Fed balance sheet shows a total net worth that is 54.7% above the 2009 trough. The nominal Q4 net worth is down 3.4% from the previous quarter and down 1.4% year-over-year. Page 1, 2019 Advisor Perspectives, Inc. All rights reserved.

2 But there are problems with this analysis. Over the six decades of this data series, total net worth has grown about 9,566%. A linear vertical scale on the chart above is misleading because it fails to provide an accurate visual illustration of growth over time. It also gives an exaggerated dimension to the bubble that began in But there is another more serious problem, one that has to do with the data itself rather than the method of display. Over the same time frame that net worth grew over nine-thousand plus percent, the value of the 1950 dollar shrank to about nine and a half cents. The Federal Reserve gives us the nominal value of total net worth, which is significantly skewed by money illusion. Here is a log scale chart adjusted for inflation using the Consumer Price Index. Page 2, 2019 Advisor Perspectives, Inc. All rights reserved.

3 Here is the same chart with an exponential regression through the data. The regression helps us see the twin wealth bubbles peaking in Q and Q1 2007, the Tech and Real Estate bubbles. The trough in real household net worth was in Q The recovery from that trough took us above the regression early last year. This indicator is now 1.3% above trend. The annualized growth rate over this time frame is 3.09%. Page 3, 2019 Advisor Perspectives, Inc. All rights reserved.

4 Net Worth Per Capita The next chart gives us a more intuitive sense of real net worth. Here we've divided the inflationadjusted series above by the Bureau of Commerce's mid-month population estimates, which have been recorded since January Since the population has grown faster than household net worth, the per-capita annualized growth rate over this time frame is lower at 1.98%. Page 4, 2019 Advisor Perspectives, Inc. All rights reserved.

5 We say "more intuitive" because the per-capita adjustment brings the latest data point from the Multi- Trillion stratosphere to $317,847 an amount we can relate to on a somewhat more personal level. The latest data point is another record high. Note: We've referred to this data series as "household" net worth. But, as we show in the chart titles, it also includes the net worth of nonprofit organizations. The ratio of two isn't clearly defined in the Fed data, and it obviously varies by asset and liability component. One easy (and rather illuminating) point of comparison in the Z.1 data is the relative share of real estate at market value (B.1 lines 3 and 8). In the latest report, nonprofit organizations account for about 8% of combined household and nonprofit real estate. That percentage in the quarterly data has ranged from a high of 14.5% in Q to a low of 7.8% in Q Page 5, 2019 Advisor Perspectives, Inc. All rights reserved.