George S. May Business Blog

Where is this Oft-Mentioned Recovery?

Yes Virginia, there is a recovery. Though you might not believe me if I told you, The Federal Reserve reported Thursday that the net worth of U.S. “households” increased at about a 5% annual rate in the fourth quarter of last year, which while a good deal slower than the blistering 20% pace America enjoyed throughout the two previous quarters, is still a positive sign.

When this information hit the web, people’s immediate reactions tended to run the gamut from calling the figures inaccurate to an outright lie. If people are gaining net worth across the board, why are so many people still feeling the sting of joblessness, dwindling savings, and nightmarish accounts of medical bills an impending foreclosures?

The answer to why most people were not feeling this recovery was because most of these people were not in a period of recovery. Most of the gain in wealth has come from the rebound in the recuperating stock market, which drove a 15.4% annual rate of gain in households’ equity holdings in the same  period. For the year, their equity holders increased 30.9% and that’s only a bad year if you’re an oil company.

If you’re looking for the faces of this heartening recovery Among Americans – you Can find them on the Forbes list of the top 400 richest people in the world. American’s richest men were relegated to the No. 2 and 3 slots by Mexican magnate Carlos Slim, but nevertheless perhaps their increases can still come as good news to them.

Microsoft chairman Bill Gates saw a $13 billion increase in his net worth, to $53 billion, while his bridge partner, Berkshire Hathaway honcho Warren Buffett, gained $10 billion in wealth, to $47 billion, both largely because of gains in their investment portfolios.

See, if billionaires are able to make their way out of the red by letting their monstrous wealth simply recover, surely the rest of America has hope of brighter horizons right? Right???

These gains have largely accrued into the hands and bank accounts of a narrow cross-section of Americans.  Households aren’t defined by the typical definitions most people accept, at least not where the Federal Reserve is concerned. This means that “households” include not just regular families but also domestic hedge funds, which are out of the reach of most Americans, unless you happen to have the kinds of means of the gentlemen mentioned above, in which case, don’t worry, you’re likely safe from disaster in the first place.

Housing is the key asset of many of those who are seeing their portfolios rise from the dead, and the value of households’ real-estate assets continued to creep up in the fourth quarter, at a meager 0.9% annual rate, down some $16.575 trillion from $16.537 trillion. Still we have to take our victories where we can get them these days, and perhaps this is one that will herald a boom for all people if Reaganomics holds any water.

Meanwhile, owners’ equity in household real estate saw a higher absolute and percentage increase, to $6.313 trillion from $6.222 trillion, a 5.9% annual rate of gain. That was aided by a continued decline in households’ mortgage liabilities in the fourth quarter, to $10.262 trillion from $10.315 trillion. The reduction in mortgage debt was not so much the result of homeowners’ suddenly losing their desire to get thrown out into the street and pay down their bills as much as by people making the decision to abandon these loans altogether.

The rising amount of foreclosures, bankruptcies and so-called “strategic defaults,” where homeowners just stop paying mortgages on homes worth less than their associated liability, have become a well-recognized phenomenon in the three months since it was discussed here following the previous Fed Flow of Funds report, and that’s also not exactly what you hope to hear as a lesson in responsibility after a situation like the one homeowners have faced.

Indeed, instead of a mortgage being the last loan anybody would want default on, now it appears to be one of the first. This is not great news, but in these times it is better news than we’ve expected, so we must take it.

Still, it’s just nice to know billionaires are okay, I know I’ll sleep a little more soundly knowing that Bill Gates is still richer than most countries.

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