Thanks to a rebounding stock market, Americans' household wealth increased by $2.1 trillion last year, even as high unemployment and a sagging real estate market weighed down the economic recovery.
At the end of last year, American households saw their net worth rise 3.8 percent over the previous year to $56.8 trillion, according to figures released this week from the Federal Reserve. The stock market gains were undercut by a 1.6 percent drop in the value of Americans' real estate holdings over the last quarter of 2010. All told real estate wealth plunge fell by $244 billion over the same period 2010, an improvement of a $629 billion drop during the prior quarter.
In 2009, as the economy struggled to shake off the effects of the financial crisis, household wealth fell by 9 percent, a decrease of $5.1 trillion.
This year, however, has been quite different.
"The stock market is performing very well, it rebounded in the third quarter," Greg Daco, senior economist at IHS Global Insight. "As a result, there's been a big gain in assets for households," he added. The value of corporate equities owned by American households, for example, increased by $1 trillion.
After taking a big hit during the financial crisis, 91 percent of 401K account balances are near their 2007 level, said Jack VanDerhei of the Employee Benefit Research Institute.
"Some accounts might lead you to believe everybody's running for cover," said VanDerhei. But there was no mass migration away from 401Ks and many accounts were recovering, he said. "Psychologically, it's important because it gives people the reinforcement that they need that they are actually building something."
Corporate profits have risen steadily since 2009, jumping 17 percent since 2009, according to the Fed report. Businesses are also sitting on 1.9 trillion in cash and liquid assets, the highest level since 1984. Some economists argue that in order to create jobs, companies will have to start using that cash to hire new workers and expand.
Many companies were not confident enough in the recovery to start spending again, said IHS Global Insight economist Daco. "Cash reserves have grown exponentially since the recovery because of the desire for companies to protect themselves in case things turn bad again," he said.
But, Daco said, this trend will come to end soon. "You can't go on forever wringing the maximum productivity from your employees."
The decline in the official unemployment rate, which fell to 8.9 in February, has meant slowly growing optimism about jobs and salaries, economists said, leading to 4 percent increase in consumer spending in the fourth quarter of 2010, the fastest pace since 2006. But economists warn that rising food and fuel prices could slow the pace of consumer spending.
Consumers also paid down debt, which fell 0.1 percent to $13.4 trillion at the end of last year, the lowest level since 2004. American households also continued to pay off mortgage debt, which fell 0.3 percent in the fourth quarter. But the total financial obligations of U.S. households rose 0.2 percent as Americans took on more auto loans and student loans.
Scarred by the lessons of the financial downturn, consumers are turning away from credit cards according to Daco, who found credit card usage on a downward trend over a few years. "The mentality is shifting," he said. "During the recession, consumers realized it wasn't safe to take on excessive amounts of debt, so people paid off balances and took on less debt."
On a national scale, government debt expanded by 14.6 percent in the fourth quarter of 2010, down from 16 percent growth in the quarter before. Municipal debt, however, expanded at a faster rate, growing 7.9 percent in the last part of 2010 compared with 5.4 percent in the quarter before, emblematic of a growing crisis in American towns and cities.