WASHINGTON (AP) — The stock market rallied to record heights last month, home prices have rebounded and the wealth of American households has returned to where it was before the Great Recession.
That's just what Federal Reserve Chairman Ben Bernanke said he wanted when the Fed announced a third round of bond purchases last September.
The purchases weren't just meant to push interest rates down and make it cheaper for businesses and consumers to borrow — the traditional aim of the Fed's easy money policies. They were also designed to pump up stock and house prices, making Americans feel richer and more willing to spend — a process economists call the "wealth effect."
But the wealth effect may not have had the economic impact Bernanke hoped it would. Sure, the Dow Jones industrial average is up 11 percent since the bond-buying policy was announced in mid-September, despite plummeting Wednesday and Thursday on news that the Fed could end the purchases by the middle of 2014. And overall household wealth hit $70.3 trillion at the end of March, regaining the $12.7 trillion lost in the recession.
But Americans still aren't shopping with enough gusto to add much momentum to the economy. Consumer spending actually fell in April from March. And economic output — 70 percent of which comes from consumer spending — is expected to grow at an annual rate of just 2 percent from April through June, down from a 2.4 percent rate the first three months of 2013.
Why aren't the impressive increases in wealth helping the economy bounce back as briskly as it normally does four years after a recession?
Economists cite several reasons. The biggest gains aren't going to the vast majority of Americans. Many families are still nursing big losses on the value of their home, and the big drop in home prices from 2006 through 2011 has undermined their confidence. Moreover, their incomes have been crimped by a weak labor market and tax hikes that took effect in January.
The biggest gains in wealth are going to wealthy households that tend to save a big chunk of their incomes and spend a smaller proportion on basics such as food and clothing. "Those guys don't spend much," says economist Edward Wolff of New York University.
The disparity shows up in numbers Wolff calculated. He found that the average U.S. household's net worth rose this year to $522,000. But the average is skewed higher by the vast net worth of America's wealthiest — Bill Gates' $67 billion, for instance, according to Forbes magazine.
So Wolff looked at the net worth of the median U.S. household — those smack in the middle, where half of households earn more and half less. The median family's net worth is far more modest than the average: $61,000, Wolff estimates. That is $50,800, or 47 percent, short of where it was in 2007.
One reason: The biggest gains have come from the rise in financial markets. And the benefits of the stock market's surge have gone disproportionately to America's wealthiest households. Wolff calculates that the wealthiest 10 percent of U.S. households own more than 80 percent of stocks, even including retirement accounts such as 401 (k) plans. "The recent stock market boom has really benefited just the top," Wolff says.