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How Recessions Impact Household Net Worth


Monday, November 23, 2020
Paper currency blowing out of open window

The three recessions prior to the one caused by the COVID-19 pandemic affected household net worth unevenly. An Economic Synopses essay published in August examined how these downturns affected four different groups of households.

St. Louis Fed Senior Economic Education Specialist Diego Mendez-Carbajo divided households into wealth quantiles: the top 1%, the next 9%, the next 40% and the bottom 50%, according to data from the Survey of Consumer Finances.

“These quantiles were affected differently, which can be explained by the asset composition of household wealth,” the author observed. He offered that the most striking differences were seen during and after the Great Recession (2007-09).

The 1990-91 Recession

Mendez-Carbajo found that during the eight-month recession ended in March 1991, the top 1% and the bottom 50% of households increased their net worth by just over 10%. Within five years of the business cycle peak, all four groups had gained a measure of net worth, although the increase for the bottom half was uneven, he noted.

Changes in Net Worth by Wealth Quantile between 1990:Q3 and 1995:Q3

NOTES: The figure shows an index with a start date of the third quarter of 1990, which represents the peak of that business cycle, and four lines tracing the household net worth for each of four wealth quantiles—top 1%, next 9%, next 40% and bottom 50%—indexed at 100 on that date. The end of the sample is 20 quarters out, ending in the third quarter of 1995.

The 2001 Recession

During the eight-month downturn that ended in November 2001, the top 1% and the bottom 50% lost net worth. However, both groups recovered those losses soon after the recession ended, Mendez-Carbajo noted. Within five years after the business cycle peak, the top 1% and the next 9% of households posted large gains in net worth (60%), while the bottom half saw only a small uptick, the author found.

Changes in Net Worth by Wealth Quantile between 2001:Q1 and 2005:Q1

NOTES: The figure shows an index with a start date of the first quarter of 2001, which is represents the peak of the business cycle. The household net worth of each wealth quantile (top 1%, next 9%, next 40%, and bottom 50%) is indexed at 100 on that date. The end of the sample is 20 quarters out, ending in the first quarter of 2005.

The Great Recession

The Great Recession produced a different story. This recession was more than twice as long as the previous two (18 months) and had the greatest impact on the bottom 50% of households, costing them as much as 42% of their net worth during the downturn, Mendez-Carbajo found.

“Differences in the asset composition of wealth across quantiles can explain these differences,” he wrote.

Changes in Net Worth by Wealth Quantile between 2007:Q3 and 2017:Q3

NOTES: The figure shows an index with a start date of the third quarter of 2007, which represents the peak of the business cycle. The household net worth of each wealth quantile (top 1%, next 9%, next 40%, and bottom 50%) is indexed at 100 on that date. The end of the sample is 40 quarters out, ending in the third quarter of 2017.

While the wealthiest households hold most of their wealth in financial vehicles or business investments, the least wealthy hold assets primarily in housing and consumer durables. Thus, the real estate market collapse associated with the Great Recession deeply affected the latter group: Average housing prices, which had increased in the wake of the previous two recessions, decreased by as much as 18% after 2007.

“This was an unprecedented decline in U.S. home prices,” Mendez-Carbajo wrote, noting that the largest percentage reductions were among lower-tier homes.

Households varied significantly in their recovery after the Great Recession. Within four to five years after the recession started, all but the bottom half of households had rebuilt their nominal net worth to pre-recession values. The bottom 50% took nearly a decade to return to their pre-recession mark.

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