Household wealth in the U.S. fell in the second quarter as share prices were depressed by the European debt crisis, marking a setback for Americans’ efforts to repair finances battered by the recession.
Net worth for households and non-profit groups declined by $1.5 trillion to $53.5 trillion, according to the Federal Reserve’s Flow of Funds report issued today in Washington. Home values rose because of a tax credit that has since expired.
The Standard & Poor’s 500 Index dropped 12 percent during the three months ended June 30, erasing gains from the previous quarter. While stock indexes have climbed this quarter, renewed signs of weakness in housing and unemployment near a 26-year high may prompt Americans to increase their savings, holding back the economic recovery.
“Households are being very frugal in what they spend and allocating more of their income to paying off debt,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “Over time, consumers need to work themselves into a better financial position and that’s not going to happen overnight.”
Confidence among U.S. consumers unexpectedly fell in September to a one-year low, according to a separate report today.
The Thomson Reuters/University of Michigan preliminary index of consumer sentiment dropped to 66.6 following a reading of 68.9 in August, the group said. Economists forecast the measure would rise to 70, according to the median estimate in a Bloomberg News survey.
Company Cash Holdings
Companies are hoarding cash until they see solid signs of sustained improvement in the economy, today’s report indicated. Nonfarm, non-financial companies had $1.85 trillion in cash and other liquid assets at the end of the second quarter, down $1.6 billion from the prior quarter’s record level. Cash holdings rose 18 percent from year earlier in the second quarter.
Household holdings of corporate equities decreased in value by $940.4 billion in the second quarter, according to the Fed’s report. The value of real-estate investments increased by $120.7 billion.
Owners’ equity as a share of their total real-estate holdings increased to 40.7 percent last quarter from 40.3 percent in the first three months of the year. The measure reached a high of 59.7 percent at the peak of the housing boom in 2005.
Americans are cutting debt and increasing savings as they cope with an unemployment rate that has stayed above 9 percent and seek to rebuild some of the wealth lost during the worst recession since the 1930s.
“Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit,” the Federal Open Market Committee said in its Aug. 10 statement.
Fed policy makers last month took their first step to shore up the recovery, voting to put a $2.05 trillion floor under their holdings of securities to prevent money from draining out of the financial system. They kept their key interest rate unchanged in a range of zero to 0.25 percent.
The personal savings rate averaged 6.1 percent in the second quarter, up from an average 5.5 percent in the first quarter, according to Commerce Department data.
The unemployment rate in the U.S. rose to 9.6 percent in August from 5 percent in December 2007, when the recession began. The rate will average 9.2 percent next year, according to the median forecast in a Bloomberg News survey of economists next month.
The S&P/Case Shiller 20-city home price index rose 2.3 percent in the second quarter from the first three months of the year and was up 3.6 percent from a year earlier, as a homebuyers’ tax credit boosted demand. The index in June was still 28 percent below its July 2006 peak.
Home-price gains may fade following the expiration of the tax credit in April, undermining the consumer spending that accounts for 70 percent of the world’s largest economy.
The slide in U.S. home prices may have another three years to go as sellers add as many as 12 million more properties to the market, according to analysts from Moody’s Analytics Inc., Fannie Mae, Morgan Stanley and Barclays Plc.
Consumer debt dropped at a 2.3 percent annual pace in the second quarter, today’s report showed.
Mortgage borrowing dropped at a 2.3 percent pace from April through June, while other forms of consumer credit declined at 2.5 percent rate, the Fed’s report showed.
Corporations, in contrast to smaller firms, are having little trouble accessing credit through public bond sales.
Net borrowing by non-financial corporations was $272.8 billion last quarter compared with $369.4 billion in the first three months of the year. That compared with a decline of $255.6 billion for non-corporate businesses after a drop of $302.3 billion in the prior three months.
“The difference could not be more stark between major corporations and small business,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “Big companies have complete access to raise all the capital they need from the bond markets, while small companies without a track record of steady revenues are being shunned by banks.”
Economic growth slowed to a 1.6 percent pace in the second quarter following a 3.7 percent gain in the first quarter, according to revised data released Aug. 27. Economists surveyed this month by Bloomberg forecast growth will average 2.5 percent next year.
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