The 5-year mark: Stock market is booming, but most households have not regained lost wealth
This article first appeared in the St. Louis Beacon, Sept. 19, 2013: Five years after the U.S. financial crisis, the stock market has rebounded and risen to new heights, but analysts say the majority of U.S. households are still struggling to regain the financial footing they lost during the Great Recession.
While the ups and downs of the stock market are daily headlines, the fortunes of Wall Street trickle down slowly to Main Street. That’s because the majority of Americans do not own stock; they put their money in their houses, and that market is still sputtering.
"The big story here is that the recovery has been very uneven, and it’s understandable how the typical American is not feeling like there’s been much of a recovery -- because they don’t own the kind of assets that have been appreciating,’’ said Ray Boshara, a policy analyst and director of the Center for Household Financial Stability at the St. Louis Federal Reserve.
U.S. households lost about $16 trillion in wealth -- from peak to trough – during the Great Recession that economists say started in December 2007 and ended in June 2009. Using data from the Survey of Consumer Finances, the Fed researchers have found that the typical family has recovered just 63 percent of lost wealth, when numbers are adjusted for population and inflation.
By the numbers: Where are we?
The stock market has bounced back
• On Monday, the fifth anniversary of the start of the nation’s financial crisis, the Dow Jones Industrial Average rose 118 points, closing at 15,494 -- up 18 percent since the beginning of the year. The Dow fell by more than half - 51 percent -- from a peak of 14,165 on Oct. 9, 2007, to a low of 6,926 on March 5.
• Who owns stock? According to a Fed analysis of direct stock ownership: The top 1 percent of the wealthiest Americans average $1.1. million in publicly traded equities. The next 9 percent: $121,000. For the bottom 60 percent, the average is $4,000 to $4,200. Most Americans are invested in the stock market through pension plans or 401(k) accounts.
That uneasy feeling
Here are findings from a national survey taken in early September by the Pew Research Center gauging how Americans are feeling about the recovery:
• Slightly more than half of the respondents -- 54 percent -- said household incomes have hardly recovered at all from the recession, while 42 percent said they have partially recovered. Just 2 percent said they have fully covered.
• The numbers were similar regarding jobs: 52 percent said they have hardly recovered; 45 percent said they have partially recovered and 2 percent said they have fully recovered.
• Low-income respondents were more likely to say that the recession had a major impact on their personal finances and that they have not recovered. Of respondents with family incomes below $30,000 a year, 44 percent said their finances have not recovered. About one-fifth -- 22 percent -- of respondents with incomes over $75,000 said they have not recovered.
No change in income -- or poverty
According to the U.S. Census Bureau’s annual report on income, poverty and health insurance, released on Tuesday, it was more of the same in 2012:
- U.S. median household income, adjusted for inflation, remained statistically unchanged at $51,017. Though income didn’t rise in 2012, it also didn’t fall as it had done the previous two years. A five-year comparison of real household income showed an 8.3 percent decline since 2007, the year before the U.S. economic downturn.
- The U.S. poverty rate remained at 15 percent -- about 46.5 million people. That rate is 2.5 percentage points higher than 2007. The poverty rate for families also remained statistically the same: 12 percent, about 9.5 million families. The poverty threshold in 2012 was $23,492 in income for a family of four.
What have we learned?
The Fed’s analysis of household finances has found that the 2008 financial crisis --- and the ensuing economic downturn -- can be explained by a series of balance-sheet failures, Boshara said.
The contributing factors include:
- the highest rate of homeownership ever recorded, along with the highest concentration of wealth in housing ever recorded
- the lowest personal savings rate since the 1930s
- the highest U.S. debt-to-GDP (Gross Domestic Product) since the 1950s
- record numbers of Americans using alternative financial services
"In our view, the crisis was the convergence of these balance-sheet failures all happening at the same time,” Boshara said. "Too many people having homes that probably shouldn’t have had them. Those who had homes had too much wealth in their homes; their balance sheets were not diversified. Unsustainable levels of debt and low levels of savings, meaning families had no economic cushion. And up to one-third of families doing their banking at payday lenders and check cashers -- which is not the way to build a healthy balance sheet."
Every segment of the population lost wealth during the recession, but families headed by Americans under age 40 were particularly hard hit, according to the Fed’s balance-sheet analysis. The three strongest predictors for who recovered wealth and who did not: age, race and education level.
"What’s really startling is if you look at it by demographics. For nonwhite families, 88 percent of the wealth they lost was due to homeownership. For young families -- those under 40 -- it was 75 percent of their loss,’’ Boshara said.
During the past 25 years, financial assets and stocks have historically performed the best, while residential real estate has been one of the lowest performers, he said.
"Leverage doubles your risk,’’ Boshara noted. "Not only did families lose the value of their homes, they were left with a crushing debt -- less assets to work with to rebuild and to cushion further losses. And you still have this crippling debt on your balance sheet.’’
Boshara said it’s not surprising that the Great Recession, in retrospect, has been categorized by some economists as a balance-sheet recession.
"The balance sheets of most Americans are still being rebuilt,’’ he said. "Until they’re rebuilt it is hard to imagine a full recovery.’’
The Fed research suggests that going forward, families should diversify their assets instead of putting all of their investments into the housing basket.
"You really have to think about ways to get other kinds of savings and assets on your balance sheet if you want to have some prospect for growth and stability,’’ Boshara said.
Missouri one of two states with a decline in median household income.
Among data released today by the Census Bureau, "In Union, 25.2 percent of the civilian employed population 16 and older worked in the manufacturing industry, among the highest in the area. Among the places at the opposite end of the spectrum was Shrewsbury, where 4.6 percent did so. Area-wide, the corresponding rate was 11.4 percent."
The 5-year mark: Snapshots of the recovery
This series of economic snapshots focuses on where the U.S. economy stands five years after the meltdown of some of the nation’s largest financial institutions.
To learn more, check out this Washington Post graphic that summarizes the major events of that harrowing week in September 2008.