Note from dshort: The last two charts below are some of the ones I’ll be including in a broader perspective on economic and market trends at the Retirement Industry Income Association (RIIA) Fall Conference in October. I hope to see some of you there.
After the release last week of the Federal Reserve’s quarterly Flow of Funds report, I saw a number of references to the data series for household and nonprofit organisation net worth. A quick glance at the complete quarterly data series in linear chart suggests a bubble in net worth that peaked in Q2 2007 with a trough in Q1 2009, the same quarter that the markets bottomed. The latest Fed balance sheet shows a total net worth that is 18.1% above the 2009 trough but still 11.3% below the 2007 peak. The disappointing news in the Q2 balance sheet is that total net worth has slipped 0.3% from Q1 of this year.
But there are problems with this analysis. Over the six decades of this data series, total net worth has grown by 5000%. A linear vertical scale on the chart above is misleading in its failure to provide an accurate visual illustration of growth over time. It also gives an exaggerated dimension to the bubble that began in 2002.
Here is the same chart, courtesy of the FRED (Federal Reserve Economic Data) repository), this time with a log vertical scale. The difference is rather astonishing.
But there is another problem, one that has to do with the data itself rather than the method of display. Over the same time frame that net worth grew 5000%, the value of the 1951 dollar shrank to about 11 cents. The Federal Reserve gives us the nominal value of total net worth, which is significantly skewed by money illusion. Here is my own log scale chart adjusted for inflation using the Consumer Price Index.
Let’s now zoom in for a closer look at the period since 1980. I’ve added some callouts to highlight where we are currently with regard to the all-time peak and 2009 trough.
So now let’s compare the nominal and real statistics for the peak-to-trough and recovery-to-date.
- Peak: The nominal peak occurred in Q2 2007; the real peak occurred in Q1 2007.
- Trough: The nominal and real troughs occurred in Q1 2009. The nominal peak-to-trough decline was 24.9%. The real decline was 27.0%.
- Recovery to date: The latest Flow of Funds report shows a nominal recovery of 18.1% off the trough. The real recovery is 11.0%.
- Latest Quarter: Quarter-over-quarter, nominal total net worth in Q2 declined 0.25% from Q1. The real decline was 1.96%.
We’ll take another look at the nominal and real numbers after the release of the Q3 Flow of Funds data on December 8th.
Note: I’ve referred to this data series as “household” net worth. But, as I show in the chart titles, it also includes the net worth of nonprofit organisations. The ratio of two isn’t clearly defined in the Fed data, and it obviously varies by asset and liability component. I’ve seen estimates that the nonprofit component is around six per cent of the total net worth.
One easy (and rather illuminating) point of comparison in the Flow of Funds data is the relative share of real estate at market value (B.100 lines 3,4, and 5). In the latest report, nonprofit organisations hold 10.9% of combined household and nonprofit real estate. That percentage in the quarterly data has ranged from a high of 16.9% in 1974 to a low of 7.3% in Q2 2005, a couple of quarters before the peak in the residential real estate bubble.
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.