Household wealth dipped in the spring

[September 17, 2011]  WASHINGTON (AP) -- Americans' wealth declined this spring for the first time in a year, as stocks and home values fell. At the same time, corporations increased the size of their cash stockpiles.

The combination could slow an already weak economy because it implies that families have less to spend and businesses are reluctant to expand.

Household net worth dropped 0.3 percent to $58.5 trillion in the April-June quarter, according to the Federal Reserve's Flow of Funds report released Friday. The decline followed three straight quarterly increases.

The value of Americans' stock portfolios fell 0.5 percent in the second quarter. Home values dropped 0.4 percent.

Corporations held a record $2 trillion in cash at the end of June, an increase of 4.5 percent from the January-March quarter.

Consumers are already struggling with high unemployment and meager pay raises.

When people feel poorer, they spend less. That slows growth. Businesses then respond by cutting back on hiring and expansion plans. It can become a cycle.

Net worth is expected to fall even further in the July-September quarter because stocks plunged in late July and early August.

A key reason was the government said the economy barely grew in the first half of the year. Investors also reacted to lawmakers' battle over raising the government's borrowing limit and Standard & Poor's downgrade of long-term U.S. debt.

"August put a big dent in whatever confidence consumers had left," said Greg McBride, senior financial analyst at Bankrate.com. That's largely why retail sales were flat last month, he added.

Overall, household wealth, which mostly consists of home equity, stock portfolios, and other savings, has risen 15 percent since the recession officially ended in June 2009.

The increase is due almost entirely to one of the fastest bull markets in history. Stocks began to recover in the spring of 2009 and doubled in value by April of this year, according to the S&P 500 index.

But Americans' wealth has taken a hit since the second quarter, which was the period covered by the Fed report. The S&P index has tumbled 11 percent since its April 29 peak, and 8 percent since the end of the quarter. That likely means an even larger drop in household net worth in the July-September quarter.

Stock portfolios make up about 15 percent of Americans' wealth. That's less than housing but ahead of bank deposits, according to the Fed's report.

An estimated 88 percent of people with 401(k) retirement savings plans now have more money in their accounts than they did at the 2007 market top, according to Jack VanDerhei of the Employee Benefit Research Institute in Washington. That's largely because of workers' continued contributions to their accounts over the past four years.

Eighty percent of stocks belong to the richest 10 percent of Americans, who also account for a disproportionate amount of consumer spending. The richest 20 percent represent about 40 percent of consumer spending.

The likely drop in wealth comes at the same time that incomes are stagnating, particularly for middle-income households. Average household income, adjust for inflation, fell 6.4 percent last year from 2007, the year before the recession, the Census Bureau said earlier this week.

Americans also have less equity in their homes. The average homeowner has just 38.6 percent equity, down from 61 percent a decade ago.

Normally, home equity rises as you pay off a mortgage. But home values have fallen dramatically since the housing bubble burst in 2006. Many homeowners are losing equity even though the balance on their loan is getting smaller.

Home equity plays a large part in how much money people feel like they have. If they are swamped by hefty mortgage payments, they're less likely to spend freely. Home equity also serves as collateral for loans.

The report found household debt declined at an annual rate of 0.6 percent from the previous quarter, helped by a big decline in mortgage debt, which has fallen for nine straight quarters.

But the decline is deceiving. Mortgage debt is coming down because so many Americans are defaulting on payments and losing their homes to foreclosure, not just because people are paying off loans.

Home prices are expected to keep falling until the number of foreclosures is reduced, companies start hiring in greater force, banks ease lending rules and more people believe it makes financial sense to buy a house. Economists say that's unlikely to happen for at least another year.

The Fed's quarterly report documents wealth, debt and savings for corporations, governments and households. It covers most of the financial transactions that take place in the United States.

[Associated Press; By CHRISTOPHER S. RUGABER and DAVE CARPENTER]

Carpenter reported from Chicago. AP Economics Writer Derek Kravitz contributed to this report.

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