One of the factors preventing a robust economic recovery is deleveraging, as households and businesses pay down debts and restore net worth to long-run norms.
The purple line is the 25-year average of the NW/DPI variable. As the chart illustrates, the Great Recession took a toll on household wealth. Peaking in the middle of 2007 at a value of 6.35 of NW/DPI (meaning households’ net worth totaled 6.35 times current income), that measure reached a minimum of 4.5 in the first quarter of 2009 during the depths of the Great Recession.
As a result of this decline in the conditions of household finances, the rate of personal savings increased from 1.8% in the third quarter of 2007 to a high of 7.2% in the second quarter of 2009. The savings rate then declined to less than 6%, but bumped up to 6.2% in the second quarter of 2010 as a result of mid-2010 stock market and housing price declines.
At the current post-2009 trend, NW/DPI will return to the 25-year historical average level of 5.2 during early 2011, faster than we have previously calculated (we previously estimated mid-2012).
As NW/DPI increases, historical correlations suggest the personal savings rate will continue to decline, perhaps approaching 3% to 4%, thereby freeing household budgets for consumption and investment and promoting more robust economic growth.
- Q4 Flow of Funds: Household Real Estate assets off $6.3 trillion from peak (calculatedriskblog.com)
- Household Net Worth Rises (online.wsj.com)