Real U.S. household wealth sank at a record 20.9% annual rate to $143 trillion in the second quarter of the year, with modest gains in home values offset by high inflation and a big selloff in the SPX stock market.
according to data released Friday by the Federal Reserve and analyzed by MarketWatch.
In current (or nominal) dollar terms, household wealth fell by $6.1 trillion from March 31 to June 30, the Fed said. But the real damage was worse than that because inflation was so high: After adjusting for the severe decline in the purchasing power of a dollar, the real (or inflation-adjusted) value of total household wealth fell by $8.7 trillion.
The decline in wealth could have a significant impact on consumer sentiment and the economy. This is a feature, not a bug, of Fed policy as it tries to slow the economy to fight inflation.
While the Fed doesn’t directly target stock prices, policymakers know that higher interest rates generally hurt stocks and that the loss of wealth on Wall Street is one of the main ways the Fed can affect the economy on Main Street. Consumer spending could fall by hundreds of billions of dollars next year through this wealth effect.
Since the end of June, the stock market is up about 7%. However, house prices fell in real terms in June, the latest month for which we have data. For most families, housing wealth is more important than the stock market.
More about housing: Real home prices sink after double-digit gains—but relief won’t show in inflation reports anytime soon
Wealth is defined as the value of all assets owned by US residents (such as stocks, homes and bank accounts) minus the value of their liabilities (such as debt).
It makes sense to adjust household wealth for inflation because what people care most about is what their wealth (and the income it generates) will buy in the real world. When inflation is high, asset values must rise in nominal terms just to stay flat.
Unfortunately, the Fed reports the data in nominal terms and is not adjusted for inflation, in part because the release of the Fed’s economic accounts follows global reporting standards. Unfortunate because reporting the figures in nominal terms distorts the reality of the effect of inflation on family wealth.
In the first half of the year, the real wealth of Americans fell by $11.5 trillion. However, real wealth has increased by about $15 trillion from pre-pandemic levels in the fourth quarter of 2019, an annual increase of 4.5%.
For comparison, real wealth fell by $7.1 trillion (in 2022 dollars) in the first quarter of 2020 when the COVID-19 pandemic hit. During the Great Recession of 2008-09, real wealth fell by $16.1 trillion (also in 2022 dollars) in six quarters.
In real terms, household holdings of corporate stocks and mutual funds fell by a record $7.4 trillion to $35.3 trillion in the second quarter, the Fed said. At the same time, real home values rose by $771 billion to $41.2 trillion as home prices continued to rise faster than overall inflation.
The quarterly financial accounts report also said real non-financial debt rose 0.3% in the second quarter and rose 0.3% a year earlier.
This is a vital statistic for monetary policy because the Fed is raising interest rates 00 FF,
in order to slow the growth of lending as a way of reducing demand and suppressing inflationary pressures. It is clear that the increase in real debt by households, businesses and local governments is extremely slow and has been for the past two years.
Rex Nutting is a MarketWatch columnist who has been writing about the economy for more than 25 years.
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