New York Times - January 19, 2000
Fed Reports Family Gains From Economy By RICHARD W. STEVENSON
WASHINGTON, Jan. 18 -- In the most detailed look so far at how families have fared during the nation's long run of prosperity, the Federal Reserve said today that the strong economy pushed more households into higher income brackets, and that the strong stock market showered benefits on all but those with the lowest incomes.
The report, based on an in-depth survey of the finances of more than 4,000 households in 1998 and comparisons with similar surveys in 1989, 1992 and 1995, also found a sharp rise in the percentage of families owning stocks directly or through retirement plans.
And while generally finding most households to be in slightly better financial shape relative to 1995, the report, the Fed's survey of consumer finances, flashed some warning signs about the accumulation of debt. The proportion of families that had missed a debt payment by two months or more, for example, rose to 8.1 percent in 1998 from 7.1 percent in 1995.
"While income continued a moderate upward trend, net worth grew strongly, and the increase in net worth was broadly shared by different demographic groups," the report said.
It did not draw any explicit conclusions about the degree to which the gap between rich and poor was growing. But it was relatively clear in suggesting that education levels played a crucial role in determining economic success.
And the report showed that while white families tended to enjoy strong growth in net worth -- assets like stocks and equity in a home minus liabilities like mortgage and credit card debt -- nonwhite and Hispanic families were far less likely to have seen big jumps in their wealth from 1995 to 1998.
In many ways, the report simply confirmed what other statistics and common sense have previously suggested: that the combination of a long economic expansion and a bull market on Wall Street left most people making a little more money and feeling somewhat wealthier.
The survey found that the net worth of the median household -- that is, the level at which half the families were above and half below -- was $71,600 in 1998, up 17.6 percent from 1995, when the figure was $60,900, adjusted for inflation. The Fed's data suggested that much of the gain in net worth flowed to the very wealthiest families. But it also showed substantial gains among households with incomes starting at $25,000.
Median family pretax income rose to $33,400 in 1998, up 2.1 percent from $32,700 in 1995, the Fed said. It was the first time during the 1990's that median income, adjusted for inflation, had surpassed the level of 1989, when it was $32,800.
The gains appeared to be concentrated on wealthy families, with the income figures for nearly all groups flat or down slightly from 1995 to 1998. Self-employed people also had large income gains in the period.
But the data also suggested that more households were slowly pulling themselves out of lower-income groups and more firmly into higher- income brackets.
The proportion of families making less than $10,000 a year declined to 12.6 percent of all families in 1998, from 15.1 percent in 1995. Families making from $10,000 to $24,999 declined to 24.8 percent of the population, from 25.4 percent; families making $25,000 to $49,999 fell to 28.8 percent, from 31 percent.
Families making $50,000 to $99,999 rose to 25.2 percent of the total, from 21 percent in 1995, while those in the $100,000-and-above bracket rose to 8.6 percent, from 7.4 percent.
While the numbers were positive in the aggregate, they struck some analysts as showing remarkably little improvement given the strength and duration of the expansion.
"We have lived through a stock market such as none of us have ever seen and few of us ever dreamed of," said Henry J. Aaron, a senior fellow at the Brookings Institution, a liberal-leaning research organization. "Unemployment has fallen to the lowest levels in more than three decades. Yet these global measures of well-being have moved little. Income is flat. Asset holdings are up a few percent."
Still, Mr. Aaron said, "it is very easy to see the effects of the booming stock market in assets holdings -- in the increase in asset holdings, in the increase in equity holdings, in the increase in the value of retirement accounts."
The Federal Reserve's chairman, Alan Greenspan, has long been concerned about the way in which paper and realized gains from the stock market are fueling consumer spending and the overall growth of demand in the economy.
He warned in a speech last week that the superheated market might be pushing the economy to grow faster than can be sustained over the long run without igniting inflation, and he strongly hinted that the Fed would raise interest rates next month in an effort to cool both the markets and the economy.
The Fed's report today showed that the percentage of families owning stocks directly or indirectly through mutual funds and 401(k) programs rose to 48.8 percent in 1998, from 40.4 percent in 1995 and 31.6 percent in 1989. The median value of those stockholdings rose to $25,000 in 1998, from $15,400 in 1995 and $10,800 in 1989.
Median net worth among households with incomes of less than $10,000 fell to $3,600 in 1998, from $4,800 in 1995, the report said, while net worth among those making $10,000 to $25,000 fell from $31,000 to $24,800, adjusted for inflation.
But the median net worth of families earning $25,000 to $50,000 rose to $60,300 in 1998, from $56,700 in 1995. Those with incomes between $50,000 and $100,000 had net worth of $152,000, up from $126,600, during the period.
The median household with an income of $100,000 or more had virtually no change in wealth. But that statistic hid a large gain among the wealthiest of households. Looking at average net worth for the $100,000-plus income group more accurately captures the wealth increase among the super-rich than median statistics, which are typically used to identify the position of someone right in the middle of the group.
Average, or mean, net worth in the $100,000-plus income group jumped to more than $1.7 million in 1998 from $1.4 million in 1995, a rise of 22 percent.
The study found that families are taking on more debt, but that debt did not rise as quickly as assets. Still, the report found some troubling signs that households could get into trouble should the economy slow.
Not only has the proportion of people making late debt payments been rising, so has the proportion of people whose debt payments exceed 40 percent of their annual income, a rough rule of thumb for the level at which debt can endanger financial health. In 1998, 12.7 percent of families had debt-to-income ratios of more than 40 percent, up from 10.5 percent in 1995.