Wealth Hits Another Peak. Time to Celebrate or Worry?

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In 2016, aggregate household wealth in the U.S. reached a new high of almost $93 trillion, hitting a post-World War II record of 6.61 times annual disposable personal income. A recent edition of In the Balance explored whether this recent peak in wealth is cause for celebration or worry.

“Only time will tell for sure, but the composition of today’s record household wealth might give us some comfort,” according to the authors, Lead Economist William Emmons and HFS Lead Analyst Lowell Ricketts, both with the St. Louis Fed’s Center for Household Financial Stability.

2006 versus 2016

Wealth previously peaked at 6.59 times income in 2006, shortly before the global financial crisis and Great Recession. Before that, household wealth reached a new high in 1999 at 6.24 times income. The collapse of the dot-com bubble and a recession likewise followed in short order.

However, the situation was different in 2016, Emmons and Ricketts said. “In particular, neither of the two large and volatile asset classes of equity shares and real estate, whose sharp declines triggered the last two recessions, is at an all-time high now compared to income or assets,” they explained.

In addition, households’ liabilities such as mortgage debts, which overwhelmed millions of U.S. families during the housing crash, were substantially less worrisome in 2016.

Why Worry Less Today?

In making the case that the composition of the aggregate household portfolio today is arguably less worrying than at the 1999 or 2006 peaks, Emmons and Ricketts cited the following:

• Neither equity shares nor real estate were at unprecedented levels compared with household income or assets.
• Household liabilities, which created huge problems after 2006, were much lower last year relative to household income and assets than the previous highs of these ratios.

The authors noted that these factors may calm concerns that a collapse of either market is imminent. If one market crashed, household wealth might be buffered by resilience in the other, which happened after 1999.

“As always, the significance of a milestone such as a new post-WWII peak in household wealth will be clear only in retrospect,” they wrote. “Supporting the argument against an interpretation of the 2016 peak as an ominous signal of imminent collapse is today’s more benign composition of the aggregate household balance sheet.”

In addition, there is also the possibility that there were factors unique to 1999 and 2006 that were important causes of those downturns beyond their respective wealth peaks.

Nonetheless, “the only experiences we’ve had with wealth-to-income ratios far above previous historic norms both ended badly,” Emmons and Ricketts noted. “Caution certainly is warranted.”

Additional Resources

• Housing Market Perspectives: The End Is in Sight for the U.S. Foreclosure Crisis
• On the Economy: What Should Be Done Differently to Address Wealth Inequality?