Americans' Net Worth Grew in 2006

A new report from the Fed shows that household net worth grew at a robust rate in the fourth quarter, thanks mostly to strong gains in financial instruments

The housing market is in a slump. Subprime mortgage companies like New Century Financial (NEW) are struggling. And retail sales are soft. But in a surprising piece of economic news, Americans actually got richer in the last three months of 2006. The data were released on Mar. 8 by the Federal Reserve, in its Flow of Funds report.

Household net worth—that's how rich you are after liabilities like the mortgage are subtracted from assets like the house—rose 2.5% in the fourth quarter and was up 7.4% from a year earlier.

How so? The strong stock market made up for the weak housing market. Household assets increased 2.4%, thanks mostly to growth in stocks, mutual fund holdings, and pension fund assets. The Standard & Poor's 500 stock index rose 6% in the fourth quarter, led by increases of more than 40% at Allegheny Technologies (ATI), Goodyear Tire & Rubber (GT), Terex (TEX), and Phelps Dodge (PD). Household real estate assets went up 0.9%, not an impressive gain but better than a decline.

On the liability side of the balance sheet, Americans pulled in their horns last year. Demand for mortgage credit has fallen five quarters in a row, Global Insight said in an analysis of the Fed data.

Good News for Consumer Spending

This is good news for the ability of consumers to keep spending and keep the economic expansion on track, despite recent negative reports from retailers. On the down side, the U.S. personal savings rate is negative, meaning that people are spending more than their disposable income. But the Mar. 8 report shows that the lack of savings is being compensated for by asset gains. In fact, Americans' ratio of household net worth to their income has been rising steadily since 2002.

While the news from the fourth quarter is good, there are still challenges ahead. Housing continues to weaken and the stock market has gotten a little scary. Global Insight economist Brian Bethune says, "Prospects for the first quarter of 2007 are not quite as rosy…and we are likely to see some leveling off in the ratio of net worth to disposable income." Asks Wachovia (WB) financial economist Gina Martin: "Can financial markets continue to pick up where housing leaves off?" So far, the S&P 500 is off about 2% this year.

Before it's here, it's on the Bloomberg Terminal.