Editorial Policy

Report: Fed Tracks the Recession’s Aftermath

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By Eva Norlyk Smith, Ph.D.
April 7, 2011

If you’re one of the many Americans still struggling to get your finances back on track after the Great Recession, you’re not alone.

Almost two out of three Americans saw their net worth shrink between 2007 and 2009, according to a recent report from the Federal Reserve. At the same time, debt loads, including credit card debt, increased for many.

The report, titled “Surveying the Aftermath of the Storm: Changes in Family Finances from 2007 to 2009,” is part of the Fed’s triennial Survey of Consumer Finances. And as could be expected, it does not paint a pretty picture.

Here are some of the highlights of the Fed’s findings:

  • The median net worth of American families dropped from $125,000 to $96,000 from 2007 to 2009. At the same time, the average American net household income dropped 23 percent from 2007 to 2009.
  • While 60 percent of American households experienced a decline in net worth from 2007 to 2009, some families actually experienced gains in wealth, while others remained unchanged.
  • The decline in net worth was largely driven by falling house prices and losses in the stock market. These factors were the same across most households, whether in the high-income, mid- or low-income spectrum. The data showed no clear pattern in the factors that caused increases in wealth.
  • The consumers in the survey saw the median value of their home drop from $207,000 to $176,000 from 2007 to 2009, and the value of directly held stock pulled back by about one third, from $18,500 to $12,000.

Many walked away from credit card debt and mortgages
The number of families carrying debt decreased in the wake of the recession from 79.7 percent of households in 2007 to 77.5 percent in 2009. According to the Fed report, that decline reflects defaults on debt, rather than repayments. A record number of household were forced, or chose, to walk away from mortgages or default on credit card debt following the 2008 credit crisis.

At the same time, those with debt saw their debt loads increase. For households in debt, the total debt load (including mortgages, credit card debt and car loans) increased from $70,300 to $75,600 between 2007 to 2009. The results suggest that those with debt continue to struggle. Furthermore, families with high debt payments relative to income were more vulnerable and more likely to have a large drop in net worth.

Other highlights of the findings on household debt patterns include:

  • The number of families with credit card debt dropped from 48 percent in 2007 to 43.9 percent in 2009. However, the median balance for those with credit card debt increased to $3,300, up from $3,100 in 2007.
  • Middle class Americans were more likely to carry credit card debt. More than half of American households falling in the middle income range (40th to 80th percentiles) were carryingcredit card debt, versus 28 percent of low-income households and 32 percent of the wealthiest households. In addition, credit card debt patterns varied by age, with young adults, middle-aged adults and couples with children more likely to have credit card debt.

If there is a silver lining, it is that Americans have become more cautious about their finances following the financial crisis. When asked, most consumers said that they planned to build a larger pool of savings and take fewer financial risks. About 25 percent of full-time working heads of households also planned to retire later, by an average of two years.

While more cautious consumer attitudes are likely to strengthen household finances by decreasing spending and increasing savings, that may not necessarily be great news for the economic recovery, say experts. Consumer spending makes up about 70 percent of the economy, and it is generally considered the lifeblood of economic recovery.

“The shocks to household wealth associated with the most recent recession were extraordinary by any measure,” noted Federal Reserve Governor Elizabeth Duke in a speech to the Virginia Association of Economists.

Ms. Duke predics that the lingering recession ‘wealth shocks’ could slow economic recovery. “Some of the effects of recent economic turmoil may result in a longer period of economic adjustment than has been the case in past recessions, as fundamental attitudes appear to have shifted,” said Ms. Duke.