In addition, the report showed most of the improvement was due to gains in the stock market, which primarily benefit wealthy families. That means the recovery for other households has been even weaker.
“A conclusion that the financial damage of the crisis and recession largely has been repaired is not justified,” the report stated.
The study is part of a growing body of research on the role of household wealth — or lack thereof — in amplifying the impact of the recession and slowing the rate of recovery. Traditionally, economists and policymakers have focused on the effects of employment and income. But the report from the St. Louis Fed argued that swings in household balance sheets — which include home values, stock prices, savings and debt — were critical in determining which families weathered the financial storm and which got swept away.
The report found that the most fragile households were not well educated, relatively young or black or Hispanic, or some combination of those characteristics. Those families tended to have low savings combined with high debt and accrued much of their wealth through housing.
How those households respond to the changes in wealth is a critical component of the recovery. Top officials, including Chairman Ben S. Bernanke, have pointed to the rebound in real estate and the soaring stock market as evidence of the success of the central bank’s policies.
The Fed is spending $85 billion a month to lower long-term interest rates and stimulate the economy. It has also kept short-term interest rates to near zero. That has helped push stock markets to record highs, while home prices have jumped by the most in seven years. Consumer confidence is at its highest point since February 2008. Officials hope those factors will eventually result in more consumer spending power.
“I think we’re at an inflection point,” said Beth Ann Bovino, senior economist at Standard & Poor’s. “We’re seeing things turn around. And that’s where the optimism comes in among households.”
But research by noted economists Karl Case, John Quigley and Robert Shiller found the households were more powerful affected by declines in wealth than increases. An unexpected 1 percent drop in housing prices caused a permanent 0.1 percent decrease in spending, that study found. But a similar 1 percent rise in housing prices boosted consumer spending by only 0.03 percent.
“Rising wealth is gratifying, but the loss of wealth is terrifying,” said Mark Zandi, chief economist at Moodys.com. “Households spend somewhat more freely as their nest eggs grow, but they slash their spending when their nest eggs shrink.”
William Emmons, chief economist for at the St. Louis Fed’s new Center for Household Financial Stability, said that many of the most vulnerable households began to treat credit as another form of income during the boom. After the bust, they were forced to dramatically rethink their finances, resulting in more cautious spending.
Emmons said many families have not experienced any recovery — or are even still losing wealth. Young Americans, those with few skills or are unemployed may not have been able to rebuild any wealth. He noted that though the number of foreclosures has dropped significantly, it is still more than double the pre-crisis amount.
Meanwhile, he estimated that recent gains in the stock market mean that the recovery of wealth is nearly complete for white and Asian households and older Americans.
Wealth accumulation not only impacts families’ current financial status but also their prospects for future economic success. The St. Louis Fed report points to studies that connect savings to the likelihood of attending and completing college and economic mobility.
“Balance sheets matter in ways that income alone does not,” said Ray Boshara, head of the center.