$3.5T Increase in Household Net Worth

It was announced this week by the Associated Press that "People are saving at the lowest level since the Great Depression, and that could be a problem for the millions of baby boomers getting ready to retire." This is based on the Commerce Department's report on Thursday that the "savings rate" for 2006 was -1%.

This is pure nonsense, as the WSJ points out today in an editorial:

"As a statistic, however, the official "savings rate" is nearly as useless a guide to prosperity as the trade deficit. In the government accounts, what is called the savings rate is literally income less consumption. But the government defines income too narrowly and consumption broadly. For example, "income" doesn't measure capital gains (whether realized or not), the rising value of your home, or even increases in your retirement accounts.

Think about how you calculate your own personal "savings rate." Do you merely add up what you make in salary in a year minus what you spend? Or do you sneak a peak at whether your IRA increased in value, or check the sale price your neighbor got on his home to figure out what you might be able to get for yours? By any normal definition, "savings" should include your increase in total assets -- in other words, your gains in overall wealth."

MP: As the WSJ points out, we should focus more on "household net worth" as reported by the Federal Reserve than the "savings rate" reported by the Commerce Department. From the most recent release by the Fed for 3rd quarter 2006:

1. Between 3rd quarter 2005 and 3rd quarter 2006, household net worth increased by $3.5 trillion to $54 trillion, a 7% annual increase. The $3.5 trillion increase works out to about a $12,000 per person annual increase in net wealth, or almost $50,000 per household of 4! The $54 trillion total net worth works out to $180,000 per person, or $720,000 for a household of 4!

2. During that period, household real estate and other tangible assets increased in value by more than $2 trillion, and financial assets like mutual funds held by households increased in value by $2.6 trillion. Liabilities increased by $1.1 trillion, resulting in the $3.5 trillion increase in net worth.

3. As the related graph above from the American Shareholders Association shows, the combined assets of mutual funds and exchange traded funds (ETFs) increased $1.63 trillion in 2006, an increase of 17.7% compared to 2005. Total mutual fund and ETF assets ended 2006 at almost $11 trillion.

Bottom Line: When you have an annual increase in U.S. household net worth of $3.5 trillion and the stock market is booming and keeps setting record highs: a) any comparison the Great Depression is a real strech, b) baby boomers have nothing to worry about, and c) a negative savings rate is meaningless.