Fed Report: Money’s Tight and Debts Soar

by James Parks, Feb 24, 2006

The Federal Reserve finally came around to saying what most families already feel:  household budgets are tight and debts are soaring.

The Fed’s numbers, released Feb. 23, show inflation-adjusted family net worth barely moved from 2001 to 2004, rising 1.5 percent after rising the previous six years. Average net worth rose 10.3 percent in the three years ending in 2001, and 17.4 percent in the three years ending in 1998.

Charles McMillion, president of the business forecasting firm MBG Information Services, says Americans are carrying a lot of debt.

Today’s report verifies my own research that household and family debts soared between 2001 and 2004, not only as a share of income but as a share of assets and net worth. The Federal Reserve’s report does not consider data beyond 2004, but my own analysis shows this increase in debt-to-income and debt-to-net worth continued in 2005.

How did it get this way when the economy is supposedly booming? The Baltimore Sun explains it this way:

The negligible rise in net worth may seem surprising considering the boom in housing values. But Americans erased those gains by piling on debt. Also, many failed to benefit from the stock market recovery in 2003 and 2004 since they lightened their equity holdings.

The typical American household made little financial progress between 2001 and 2004 after making substantial gains in the previous six years, said Stephen Brobeck, executive director of the Consumer Federation of America in Washington.

Escalating debt was the principal reason. They increased their credit-card debt, their installment debt and their home mortgage debt.

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