More than any recession in 70 years, the recent economic downtown
witnessed a collapse of household wealth. The value of our wealth --
the difference between what we own and what we owe, dropped an amazing
$13 trillion, a 20 percent plunge, from 2007 to 2008. The loss came in
both major categories of household wealth, in financial assets
(stocks, bonds, mutual funds, etc.) as well as real estate assets (for
most, the value of their home).

The lost wealth was a crushing blow to our personal finances. It meant
the massive borrowing and resulting debts that many accumulated during
the 1990s and 2000s couldn’t be sustained. For some, the only
alternative was bankruptcy or perhaps foreclosure on their home. For
others, it meant forced frugality and reduced sales -- and jobs -- for
retailers and other sellers.

A deadly downward spiral was thus established. Lower household wealth
meant less household spending, which in turn, led to fewer business
sales and jobs, which then resulted in even lower household income and
wealth and tighter spending and still lower sales, etc.

Therefore, household wealth is one of the keys to our economy. For the
economy to fully recover, our wealth will have to improve first.

So where are we now with this key economic indicator? Fortunately,
every three months the Federal Reserve gives us an update. The most
recent information through the first three months of 2012 was just
recently released.

The statistics show that collectively the personal finances of
households are in much better shape today than they were at the depth
of the recession in 2008. Three-quarters of the household wealth lost
during the recession has now been recovered. However, all of this
rebound was due to the recovery of financial assets. The total value
of real estate assets has improved only very modestly.

At the same time that the value of financial assets has been
increasing, households have become tighter with their borrowing. The
total value of household debt today is down 6 percent from its high in
2007. The largest decline has been in mortgage debt; some of it due to
foreclosures and bankruptcies. But consumer credit balances (mainly
credit cards) are also lower today than five years ago, suggesting
households have voluntarily been restraining their spending.

There’s other good news on the debt front. Severely late loan
delinquencies are off their recession peaks. For example, the
percentage of credit card payments three or more months late is now 11
percent, down from 14 percent two years ago. Bankruptcies and
foreclosures have also been trending lower. Yet, all these measures
are still considerably above their levels prior to the recession.

It’s interesting to contrast the financial trends of households with
those of businesses. Businesses actually fell into a slightly larger
wealth hole than households, with aggregate business wealth dropping
25 percent during the recession. And similar to households, businesses
have dug out of this hole through a combination of a rise in their
assets values and a reduction in debt.

The big difference is that businesses have begun borrowing again. In
fact, business debt dropped only one year, from 2008 to 2009, and
since then has risen each year. Many economists see this as a good
sign, as business borrowing is one indicator of optimism about the
economic future.

The conclusion from all this number crunching is that personal
finances are in much better shape today than they have been in years.
Wealth has returned, household debt payments as a percent of
disposable income are back to 1990 levels, delinquencies and late
payments are down, and homeowners’ equity is beginning to rise.
Certainly, many households are still not financially secure, but on
average they are moving in a positive direction.

Over 70 cents of every dollar spent in our economy is by households.
Therefore, as the household goes, so goes our economy. Household
personal finances are starting to make a comeback. But one big
question is, Can “it” happen again? By it, I mean the free-wheeling
borrowing that led to record high personal debt levels and which set
up many households for a crash when the values of stocks and homes
fell off the cliff.

Of course, it can happen again; history is full of examples of
repeats. But at least in this economist’s opinion, the financial
trials and tribulations of the past five years will leave a
significant impression -- at least for a while -- on households,
similar to what the Great Depression of the 1930s did to my parents’
view of finances. But, of course, you decide if I’m too optimistic!

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