Where’s the wealth?

Stephen Roach and Wonkblog both touch on similar themes that have been on my mind recently…

From the peak of the boom to the bottom of the bust, households watched a total of $16 trillion in wealth disappear amid sinking stock prices and the rubble of the real estate market. Since then, Americans have only been able to recapture 45 percent of that amount on average, after adjusting for inflation and population growth, according to the report from the St. Louis Fed released Thursday.

In addition, the report showed most of the improvement was due to gains in the stock market, which primarily benefit wealthy families. That means the recovery for other households has been even weaker.

There has been a fair bit of discussion recently about the ongoing economic recovery–see herehere, and here from Wonkblog alone. Tim Duy jumps in too, discussing a September meeting as the likely time when the Fed will announce its intent to slow and/or end its current Quantitative Easing program.

In an economy where consumer spending drives roughly 70% of GDP, I think that the poor recovery in average household wealth is very very very bad news for our economy moving forward–especially because households are risk averse, and decrease spending more in response to a wealth decrease than they increase spending in response to a wealth increase.

An unexpected 1 percent drop in housing prices caused a permanent 0.1 percent decrease in spending, that study found. But a similar 1 percent rise in housing prices boosted consumer spending by only 0.03 percent.

Basic takeaway–don’t be fooled by the recent trend in economic optimism and bull market. Stock prices improvements don’t impact the majority of this country (and are likely inflated by QE3 from the Fed, which looks set to end later this year). Unemployment is still elevated. Growth is still under potential. All of this put together means that growth will likely remain sluggish throughout the remainder of the year and early 2014–rising house prices and stock markets aside.

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