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Household Net Worth in U.S. Declines Most on Record
Bloomberg
By Shobhana Chandra
December 11, 2008

Dec. 11 (Bloomberg) -- U.S. household wealth fell in the third quarter by the most on record as property values and stock prices tumbled, highlighting the tattered state of consumer finances even before the most recent slump in lending.

Net worth for households and non-profit groups decreased by $2.81 trillion, the most since records began in 1952, according to the Federal Reserve's Flow of Funds report issued today in Washington. Real-estate-related assets declined by $646.9 billion, three times the prior quarter's drop.

Combined with the loss of 1.9 million jobs so far this year, almost half of which occurred in the last two months, and the slump in bank financing since the credit crisis intensified, the figures darken an already gloomy outlook for consumer spending. President-elect Barack Obama has called for a stimulus package of unprecedented size as the economy slides toward the longest postwar recession.

"This is not pretty," said Michael Feroli, an economist at JPMorgan Chase & Co. in New York. "It's going to take a long time to repair balance sheets that are being severely impaired." Feroli estimated wealth will drop by about another $4 trillion this quarter if stocks stabilize at current levels and home prices decline at the same pace as in the third quarter.

Household net worth dropped to $56.5 trillion, the lowest level since the last three months of 2006, from $59.4 trillion in the second quarter. The decline over the 12 months ended in September, at 11 percent, is the biggest year-over-year drop since records began, exceeding the slump caused by the bursting of the bubble in technology stocks in 2001.

Consumer Slump

Consumer spending will probably decline 1 percent in 2009, making it the biggest drop since 1942, according to the median forecast of economists surveyed by Bloomberg News this month. The economy is projected to shrink for four straight quarters, the longest contraction since quarterly records began in 1947.

The Fed switched home-price measures to better reflect the slump in property values and revised its calculations to 2000.

The central back adopted figures supplied by LoanPerformance, a unit of Santa Ana, California-based First American Corp., that track a wider range of properties, including those financed by subprime and jumbo loans. Previously the Fed used a price gauge provided by the Federal Housing Finance Agency that excludes those homes.

Owners' equity as a share of their total real-estate holdings dropped to a record-low 44.7 percent last quarter, from 46 percent in the second quarter.

Mortgage borrowing by households fell at a 2.4 percent annual pace, after decreasing at a 0.1 percent rate in the prior quarter, the Fed said.

Government Borrowing

Total borrowing by consumers, businesses and government agencies increased at an annual rate of 7.2 percent last quarter compared with a 3.1 percent gain the prior quarter. The increase was led by a jump in government borrowing.

Total borrowing by households fell at a 0.8 percent pace after rising 0.6 percent in the second quarter. Business borrowing climbed at an annual pace of 2.9 percent after rising 5.6 percent the prior quarter.

Borrowing by state and local governments increased at a 2.9 percent rate, the Fed said.

Federal government borrowing surged at an annual rate of 39 percent, more than six times as much as the prior quarter's pace.

Job losses are making consumers more strapped for cash, and worsening the slowdown in consumer spending, which accounts for two-thirds of the economy.

A Labor Department report today showed the number of Americans filing first-time claims for unemployment benefits surged to 573,000 last week, a 26-year high, and the number of workers receiving benefits also jumped to the highest level since 1982.

To contact the reporter on this story: Shobhana Chandra in Washington schandra1@bloomberg.net
Last Updated: December 11, 2008 14:42 EST

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