Household wealth in the U.S. increased by $2.67 trillion in the third quarter as stock prices and home values climbed, putting consumers farther along the path of recovery from the biggest destruction of assets on record.
Net worth for households and non-profit groups rose to $53.4 trillion from $50.8 trillion in the second quarter, according to the Federal Reserve’s Flow of Funds report today in Washington. The gain was the second in a row following declines that began as the economy plunged into the worst recession since the 1930s.
The ratio of net worth to disposable income is now expected to be approximately 535%, rising fast but still less than the 600% level at the peaks of the tech and housing bubbles.
American consumers also reduced debt at a record pace last quarter, the figures showed, paving the way for sustained spending gains next year.
Even with the increasing wealth, savings rates are expected to remain higher than they’ve been the past few years because of the high debt levels. Household debt is currently at 122% of disposable income, down from 129%, but still high compared to the 80% level prior to the tech and housing bubbles.
The Standard & Poor’s 500 Index was up 32 percent in the six months to September, the biggest two-quarter gain since 1975, while home values increased by $244.7 billion, according to the report.
“We’re digging out of the hole,” Brian Bethune, a senior economist at IHS Global Insight Inc. in New York, said before the report. “With stocks up and home prices ticking up, it’s improving the asset position” of households. Even so, “It’s going to be an uphill battle.”
Consumer spending in the fourth quarter will probably rise at a 1.7 percent rate, according to economists surveyed by Bloomberg News this month, following a 2.9 percent gain in the third quarter. It would be first consecutive quarterly gains in purchases since the end of 2007, and follow the biggest slump in outlays since 1980.
Stimulus Programs
Federal stimulus measures such as incentives to buy cars, tax credits to buy homes and extended earning-how-to/employment-how-to/”target=”_self”title=”Employment side trips – how to find a job” >jobless benefits helped stem the slide in spending.
Consumer debt dropped at a 2.6 percent annual pace, a fifth consecutive decline and the biggest since quarterly records began in 1952.
Mortgage borrowing dropped at a 3.6 percent pace from July through September, while other forms of consumer credit fell at a 3.2 percent rate, the Fed’s report showed.
Government Borrowing
Total borrowing by consumers, businesses and government agencies increased at an annual rate of 2.8 percent last quarter, led by a 21 percent surge in federal government debt. Borrowing by businesses decreased at a 2.6 percent rate.
Borrowing by the federal government reflected spending linked to President Barack Obama’s stimulus plan. State and local government borrowing climbed at a 5.1 percent pace.
The economy grew at a 2.8 percent rate in the third quarter, after falling 3.8 percent in the prior 12 months.
Economists surveyed by Bloomberg this month forecast the economy will grow at a 3 percent pace in the fourth quarter, and 2.6 percent for all of 2010.
Over the course of the recession that began in December 2007, Americans had been constrained by plunging home and stock prices, tight credit and rising unemployment. While stocks have surged and home prices have stabilized this year, borrowing standards have tightened and unemployment remains high.
Joblessness rose to a 26-year high of 10.2 percent in October and is forecast to average 10 percent through next year, according to the median estimate of economists surveyed this month.
Equity Stakes
Today’s report showed household net worth in corporate equities and mutual funds increased by $1.38 trillion in the third quarter.
Home equity is recovering after reaching a record low in the first quarter. Owners’ equity as a share of their total real-estate holdings increased to 37.6 percent last quarter from 35.8 percent in the second quarter, today’s Fed report showed. The Fed revised the first-quarter’s record low down to 33.5 percent from the 41.9 percent previously reported.
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