March 25th, 2011
Econintersect: The Federal Reserve is beginning to leak data from a special update to the Survey of Consumer Finances (SCF) originally completed in 2007. This update used the same participants to allow specific benchmarking of the effects of the Great Recession on the USA consuming population. Follow up:
On the whole, changes in wealth appear to stem from changes in asset values more so than changes in the composition of families’ portfolios or their outstanding debt, though, again, the results vary across households. As might be expected, changes in the values of homes, stock, and business equity appear to have been particularly important determinants of changes in many families’ wealth. The economic experiences of families that might have been seen as financially vulnerable in 2007, by and large, did not differ dramatically from those of other families, except for families with high debt payments relative to income, who were more likely to have had comparatively large declines in wealth. Finally, at least overall, families appear more cautious in 2009 than two years earlier, as most families reported increased levels of desired buffer savings, and many expressed concern over future income and employment.
The results of this survey are hardly surprising, but offers a quantification of the effects of the Great Recession.
From 2007 to 2009, wealth declined for most families across the initial 2007 wealth spectrum, and it declined very substantially for some. Yet many families saw only small changes and a non-negligible group of families saw substantial increases in their wealth. This diversity of outcomes is pervasive in the data. For that reason, in this paper we use distributions to describe as clearly as possible the central tendencies and dispersions of outcomes or changes. By definition, changes in families’ portfolios underlay the observed wealth shifts, but it is sometimes not directly obvious from the data whether the changes were driven by portfolio rebalancing or by revaluation of portfolio items. Responses to direct questioning on general portfolio changes made during the interval between the 2007 SCF and the 2009 panel interview indicate that the large majority of families passively accepted changes in portfolio shares driven by changes in asset prices. Unemployment spells are also associated with wealth declines, whether because of the necessity of dissaving or because cumulated late payments might have caused the loss of an asset, such as a home, through foreclosure. Although continued saving might also account for some marginal differences, it appears that the major shifts were driven by revaluation of assets. As expected, changes in the values of principal residences and of stock and businesses equity appear to have played a substantial part in explaining the observed changes in wealth. Shifts in leverage that took place over the period are largely explained by the general decline in the value of assets.
The data show signs that families’ behavior may act in some ways as a brake on reviving the economy in the short run. Two things stand out in this regard. First, a large proportion of families in all wealth groups and across the range of changes in wealth expressed the need for greater precautionary savings. In general, compared with families with relative losses, the families with relative gains appeared more pessimistic and cautious before the crisis, and in the 2009 survey they remained cautious even though their wealth had increased. The perceived desire for additional savings is further amplified by answers to open-ended questions about recent and future adjustments to family finances. Second, the data show a tendency for families to respond asymmetrically to changes in wealth. Overall, it appears that families may be relatively reluctant to spend more when asset prices rise and may more readily reduce spending when asset prices fall. This paper has provided only a basic outline of the results from 2007–2009 SCF panel data. Subsequent research will explore more detailed behavioral responses and consider more deeply the implications of the data for the future.