Household Net Worth Dropped in 2000

For the first time since data collection began in 1945, the net worth of the U.S. household sector fell last year, by about 2 percent. The Federal Reserve Board's Flow of Funds report revealed that at the end of December 2000, household total assets (e.g., real estate, stocks, mutual funds) minus total liabilities (e.g., home mortgages, other consumer debt) totaled $41.4 trillion, down from $42.3 trillion at the end of 1999. The decline in net worth was due almost entirely to plunging stock prices. The value of stocks held directly by households dropped from $8.75 trillion at the beginning of 2000 to $6.6 trillion by year's end. Household net worth is still high by historical standards, closing the year 12 percent above where it stood at the end of 1998.

The big question is how the decline in wealth will affect consumer spending and saving. Jan Hatzius, senior economist at Goldman Sachs told The Wall Street Journal that without a stock market rebound, the economy faces "the biggest pent-up negative wealth effect that you can see in the economic data going back to 1952." Other economists are less concerned because the increase in equity prices during 1999 and early 2000 was so rapid that they may not have had time to significantly impact consumer spending behavior. That is, households probably had not fully adjusted to the greater paper wealth by increasing spending. Consequently, there may less of a positive wealth effect to "unwind" as consumers readjust to the wealth decline.

Still, the decline in wealth has continued through the first quarter of 2001. Economists estimate that the value of household equity holdings has fallen another 16% since the end of last year. The Federal Reserve Board cited the potential drag on consumer spending associated with declining stock prices as one reason for cutting rates by 50 basis points on March 20, for the third time this year.

Economists differ with respect to how quickly a negative wealth effect will induce a pullback in spending. Estimates vary from 6 months to two years. Certainly, much of the impact depends upon the duration of the dip in share prices. Bruce Steinberg, chief economist at Merrill Lynch says that if stocks bottom out by mid-year and begin rising, the drag on spending should be finished by the end of the year.