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January 16, 2009

The wealth shock

Household income during the recession has been battered by job losses, but household wealth has also been hit by declines in both the stock market and home prices. How significant has the drop been in our wealth?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, first let's define the difference between income and wealth. Income is what you earn, for example, on a monthly basis from your job, in your paycheck. Your wealth is your investments. It's the value of your assets minus the value of your liabilities. It is what you owe. Another word for wealth is net worth. And household wealth has been down big time, unfortunately, during this recession. In fact, since early 2007, household wealth has dropped $7 trillion - that's with a 't' - $7 trillion. That's 11 percent of the total. Almost $3 trillion of this has been in real estate. The rest is primarily a decline in the value of financial assets; the most important would be the stock market. Also, if you look at household wealth as a percent of household income, wealth has dropped on average from 600 percent of household income to 500 percent of household income. Now one impact of this beyond just these ugly numbers is the effect on consumer spending. There is what economists call a 'wealth effect.' The wealthier people are, the more they're going to spend. Therefore, as people's wealth has gone down, that's having a detrimental effect on consumer spending."

Posted by Dave at January 16, 2009 08:00 AM