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Rebuilding Household Wealth: Implications for Economic Recovery

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[Excerpt] Congress was an active participant in the policy responses to the 2007-2009 recession and its aftermath and has an ongoing interest in macro-economic conditions. Current macroeconomic concerns include whether the economy is in a sustained recovery, rapidly reducing unemployment, and speeding a return to normal output and employment growth. Faced with fiscal consolidation and limited further impetus from monetary policy, the momentum of the current economic recovery will likely be determined by the strength of spending by the private economy, particularly the strength of consumer spending. In the aftermath of the deep 2007-2009 recession, involving a huge loss of net worth and a large increase in the burden of debt, households’ actions to repair their balance sheets is thought by many economists to be a key factor dissipating the strength of consumer spending and, in turn, slowing economy-wide recovery and job creation. Where households currently stand in repairing their balance sheets is likely to have a strong effect on the strength of consumer spending. If substantially complete, it would point to the prospect of stronger consumer spending and increased momentum of the economic recovery; but if substantial wealth building is still needed, it would diminish that prospect. This report begins with a discussion (accompanied by graphics) of the slower than normal pace of the ongoing economic recovery and the likely role in that of weak consumer spending forced by a sharp loss of household net worth during the recession and the subsequent need to rebuild that lost wealth. Next, the report examines (also accompanied by graphics) where balance sheet repair currently stands, paying particular attention to the composition of assets that have been accumulated and the degree of debt reduction achieved. The report then considers the near-term prospect for stronger consumer spending and more rapid economic recovery. The report concludes with a discussion of the possible implications of household balance sheet repair for economic policy.

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wealth; economic recovery; household net worth; consumer spending


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