First Quarter Wipe Out

First Quarter Wiped Out $1.3 Trillion For Americans

By Jeannine Aversa, AP | 11 June 2009

WASHINGTON— The brute force of the recession earlier this year turned back the clock on Americans' personal wealth to 2004 and wiped out a staggering $1.3 trillion as home values shrank and investments withered. Net worth, or the value of assets such as homes, checking accounts and investments minus debts like mortgages and credit cards, declined 2.6 percent in the first three months of the year, the Federal Reserve said Thursday.

Those months were some of the worst of the recession so far for job losses, and the stock market sank to its lowest point of the year in March. Since then, some signs suggest the economy is stabilizing. Still, partly because of the carnage earlier in the recession, Americans are putting plans on hold until the economy improves.

While families worked harder, their wages continued to decline. Middle-class families are working harder and earning less today than they were eight years ago. Median household income, adjusted for inflation, has declined $333 from $50,566 in 2000 to $50,233 in 2007 (the latest year for which we have data) [U.S. Census Bureau, Income, Poverty, and Health Insurance Coverage in the United States: 2007 (August 2008)]. Between 2000 and 2007, the government's measure of take-home pay (median weekly earnings) increased by a mere 0.3 percent (adjusted for inflation), compared with 7.7 percent growth between 1989 and 2000 (the last comparable business cycle) [Joint Economic Committee analysis of U.S. Department of Labor, Bureau of Labor Statistics (January 9, 2009].

Employment compensation has lagged behind productivity gains. While the productivity of the American worker (output per hour) rose by 19.08 percent between the fourth quarter of 2000 and the third quarter of 2008, average hourly compensation (wages plus benefits, adjusted for inflation) increased by only 6.3 percent during this period [Joint Economic Committee analysis of U.S. Department of Labor, Bureau of Labor Statistics (January 9, 2009)]. In sum, Americans are working harder— and more productively— but are not receiving proportionally increased rewards for their hard work [Edward Teach, "A Productive Debate," CFO Magazine (December 31, 2006)].

As a result, income equality has expanded. The New York Times reported that: "an outsized share of productivity growth, which expands the nation's total income, is going to Americans at the top of the income scale. In 2005… the top 1 percent of Americans— whose average annual income was $1.1 million— took in 21.8 percent of the nation's income, their largest share since 1929" [Editorial, "Economic Life After College," New York Times, p. A18 (June 11, 2007)]. According to the Wall Street Journal, "[s]ince the end of the recession of 2001, a lot of the growth in GDP per person— that is, productivity— has gone to profits, not wages" [Greg Ip, "Wages Fail to Keep Pace With Productivity Increases, Aggravating Income Inequality," Wall Street Journal p. A2 (March 27, 2006)].

Economists at the National Bureau of Economic Research concluded that: "[t]o the extent that the productivity growth 'explosion' of 2001-2004 was achieved by cost-cutting, layoffs, and abnormally slow employment growth… the historical link between productivity growth and higher living standards falls apart. Not only have the bottom 90 percent of American workers failed to keep up with productivity growth, many have been harmed by it" [Ian Dew-Becker and Robert J. Gordon, Where Did the Productivity Growth Go? Inflation Dynamics and the Distribution of Income (December 2005) p. 62]. Indeed, the average income for 80 percent of American households has fallen since 2000 after adjusting for inflation.

According to the Joint Economic Committee, changes in income over the past year have been regressive, with the average income of the bottom fifth declining two-an-a-half times more than the top fifth. "As a result of this pattern of losses at the bottom and gains at the top, income inequality is now greater" than it was before 2001 [Joint Economic Committee analysis of U.S. Department of Labor, Bureau of Labor Statistics (January 9, 2009)]. Earnings for workers with college degrees are declining. The Wall Street Journal observed that "a four-year college degree, seen for generations as a ticket to a better life, is no longer enough to guarantee a steadily rising paycheck" [Greg Ip, "The Declining Value of Your College Degree," Wall Street Journal (July 17, 2008)].

In addition, the Los Angeles Times reported that: "[w]age stagnation, long the bane of blue-collar workers, is now hitting people with bachelor's degrees for the first time in 30 years. Earnings for workers with four-year degrees fell 5.2 percent from 2000 to 2004 when adjusted for inflation, according to White House economists… Not since the 1970s have workers with bachelor's degrees seen a prolonged slump in earnings during a time of economic growth… trends for people with master's and other advanced degrees… have found that their inflation-adjusted wages were essentially flat between 2000 and 2004" [Molly Hennessy-Fiske, "That Raise Might Take 4 Years to Earn as Well: Those with bachelor's degrees are finding their incomes stagnate despite a growing economy," Los Angeles Times p. A1 (July 24, 2006)]. And, U.S. Census data indicates that "the number of college graduates earning below the poverty line has more than doubled in the past 15 years to almost 6 million people" [AP, "College degree may not be enough to protect against poverty" (April 29, 2007)].

B. Smith, a conductor for a Chicago commuter rail line, is in no hurry to buy cars for two of his children. He spent $260,000 to build his suburban Chicago home about 10 years ago and watched its value spike to $380,000 in January 2008. Today, it stands at about $310,000. "I'm still ahead, but I'm not as ahead as I was before," he said. "Even if things improve, such a dramatic evaporation of wealth will probably make Americans more thrifty down the road," said Scott Hoyt, senior director of consumer economics at Moody's Economy.com.

"The bulk of consumers alive today have not experienced declines in wealth like this," Hoyt said. "They are already turning thrifty, and it will stay that way beyond the short term. This has been a significant learning experience". Americans' personal savings rate zoomed to 5.7 percent in April, the highest since 1995. And the amount in savings— $620.2 billion— was the most on records dating back to January 1959.

One way to save: Maurice Boler, a management consultant, said he does many repairs himself on his Indianapolis home rather than pay someone else. "I just take a little bit longer," said the 53-year-old father of four, three of whom live at home. Even if the economy recovers and starts to thrive again, he said he probably won't break out the credit cards again. "It's really not about stuff," he said. "Stuff is nice, but life is not about how much more stuff can we get."

According to the Fed report, the biggest damage to wealth in the first quarter came from the sinking stock market. The value of Americans' stock holdings dropped almost 6 percent from the final quarter of last year— in a market that was already brutal. The Wall Street slide that began in 2007 wiped out more than half the value of the U.S. stock market, but many investments have bounced back. Since the end of the period covered by the Fed report, the Standard & Poor's 500 stock index is up 20 percent.

Rick Thompson, 77, a retired broker from Huntingdon Valley, Pa., isn't losing sleep over the economy or the stock market despite seeing his net worth edge lower in recent months. He and his wife, Faith, own the four-bedroom house where they've lived for 40 years. It may have lost some of its value, but not much, he said. A conservative investor, he shifted most of their portfolio from stocks to bonds in late 2007, when the then-soaring market made him uneasy.

He admits the recession has weighed on his psyche, but the rise in stocks since early March has lifted his spirits. Thanks to the Wall Street rally, they are going ahead with plans for a trip to Europe next year. Another hit to household net worth in the first quarter came from falling house prices. The value of real-estate holdings fell 2.4 percent, according to the Fed report.

Collectively, homeowners had only 41.4 percent equity in their homes in the first quarter, the lowest on records dating to 1945, as Americans fell behind on mortgages or entered foreclosure. That was down from 42.9 percent in the fourth quarter. The Case-Shiller national home price index, a closely watched barometer, last month estimated that house prices dropped 7.5 percent during the first quarter and have fallen more than 32 percent from their 2006 peak.

While the first quarter was ugly, the hit to Americans' net worth was worse late last year. In the October-December period, it fell a record 8.6 percent, according to revised figures. That was the largest drop in records dating to 1951. If Americans continue to spend— no guarantee— Fed Chairman Ben Bernanke and other economists say they think the recession will end late this year. But if shoppers hunker down and cut spending again, that could delay any recovery. Late last year, Americans cut spending at the fastest rate in 28 years.

On Thursday, there was encouraging news: Retail sales rose slightly in May following two straight monthly declines, the Commerce Department reported. And the number of newly laid-off workers filing for unemployment fell to the lowest number since late January. Nationally, first-time jobless claims dropped by 24,000 from the previous week. But the number of people claiming benefits for more than a week rose by 59,000 to 6.8 million— the highest on records dating to 1967. Kathy Bullard, a librarian in Providence, R.I., said she plans to be even more frugal in the coming months. At 58, with a 10 percent pay cut coming on July 1 and her pension plan frozen, she doesn't expect to buy more new clothes or books anytime soon.

"I have no idea what my net worth is," she said. "It would probably just depress me."