Fed Report: US Income Growth Slows

Articles in today's Financial Times and Wall Street Journal (Typical U.S. Family's Net Worth Edged Up Only 1.5% in '01-'04 Page A4) discuss the findings of a report published by the Federal Reserve. The report points out that over the 2001 - 2004 period the median household income adjusted for inflation and before taxes only grew 1.5% to $43,200 whereas during the 1998- 2001 period it had grown at a more robust 10.3%. The report also discusses the changes in networth between the top 10% and the bottom 25%.

The net worth of the typical family in the richest 10% rose to $831,600, a 6.5% increase from 2001, adjusted for inflation. In contrast, the net worth of the typical family in the bottom 25% fell 1.5% to $13,300.

The report also notes that more families have increased their debt and a large chunk of their assets are tied to real estate.

Meanwhile, the typical family took on more debt. After declining for years, mortgage and other debt as a percentage of total family assets rose to 15% in 2004 from 12.1%, the Fed said. "The largest part of that increase was attributable to debt secured by real estate," the report said. "As debt rose over the period, families devoted more of their incomes to servicing their debts, despite a general decline in interest rates."

This is of concern because if there is a downturn in housing, many of these households will be holding assets that would be less valuable. Combine this with slow growth in real income and this could pose a threat to the economy overall because the consumer spending plays a large role in our econony.

Lastly the report also noted that during in 2004 there was a decline in savings by households
to 56.1% from 59.2%. You may have heard in recent reports that the US savings rate was in the negative, not of much concern over a quarter, but of great concern if this is a long term trend. This would mean that households would be operating way beyond their means, increasing their debt leading to a possible consumer spending slowdown.