Wealth is back. Just not for everybody.
In several important ways, the U.S. economy is finally leaving the Great Recession behind. The Dow Jones Industrial Average has eclipsed its prior high, set in 2007—and more importantly, stayed there. New data from the Federal Reserve shows that Americans have now regained all the wealth lost during the twin housing and financial meltdowns that marked the start of the recession. Hitting such thresholds sets the stage for renewed prosperity and creates the impression that things are getting back to normal.
The problem, however, is that the recession raised the bar for success while leaving fewer haves and more have-nots. America as a whole may be just as wealthy as it used to be, but the wealth is being shared by a smaller slice of the population. And that rearrangement may end up being permanent.
Wealth generally falls into two main categories: Real estate and financial assets such as investments portfolios and bank accounts. The increase in financial assets is what has really helped bring total net worth back to pre-recession levels, and that is largely due to the performance of the stock market.
But financial assets are mostly held by the wealthy. Data gathered by G. William Domhoff of the University of California at Santa Cruz shows that the wealthiest 20 percent of households own 95 percent of all financial assets. So the run-up in the stock market and in the value of financial assets has mostly benefited the wealthy. There's nothing wrong with that, but new highs in the stock market and in the total value of Americans' financial assets don't necessarily mean the middle class is recovering at the same pace. In fact, it's not.
For many middle-class Americans, their home is their most valuable asset. And housing wealth remains depressed. The total value of household real estate is still 22 percent below its 2006 peak, according to the Federal Reserve. That's a net decline of about $5 trillion in home equity.
A smaller portion of the population owns homes as well. The homeownership rate has fallen from a peak of 69.2 percent in 2004 to 65.4 percent. Had it stayed the same, an additional 5 million families would own homes instead of renting or living with somebody else. That's a lot of people who would be building wealth but aren't.
The whole economy, in fact, is producing more with less. Real GDP, adjusted for inflation, fell during the recession, but bounced back and then exceeded its pre-recession high in 2011. But it took far fewer workers to achieve the same level of economic output. Real GDP is now 2.5 percent higher than the pre-recession peak, yet total employment is 2.2 percent lower. That's a net loss of 3 million jobs.
People are earning less, too. From 2007 to 2011 (the latest available numbers), median income dropped from $54,489 to $50,054. That's a staggering 8 percent decline. Incomes may have ticked upward since then, but it will probably be years before they retrace the 2007 peak.
Some critics bellow that the rich are getting richer and the poor are getting poorer. But that oversimplifies what's going on and implies a zero-sum transfer of wealth from the poor to the rich, which is bogus logic. In a healthy economy, wealth can increase for everybody because of productivity improvements.
One pronounced but underappreciated problem is that young people—even well-educated ones—are having a hard time finding decent jobs. That means they're not buying homes or cars, or starting to save and invest. That's one reason the pace of economic growth remains so slow.
As the economy continues its gradual improvement, homes will regain value and other types of assets will probably appreciate as well. But that will mainly benefit those who can already claim some wealth. It will be harder for those hoping to build wealth from scratch, whose only peaks are in the future.
Rick Newman's latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.