Wealth Is Back!

Hey, we're rich again!

Well, not quite. American household wealth is still down nearly $11 trillion since 2007. But thanks to the 58% surge in the S&P 500 and a big push to shed debt, household net worth rose in the second quarter by nearly $2 trillion -- its first gain since 2007.

Over the past few years, here's how our total net worth has fared, according to the Federal Reserve's Flow of Funds report:

*As of the second quarter.

What strikes me about these numbers isn't how far we've fallen since 2007, but just the opposite: Net worths are now about where they were in 2004-2005, a period when everyone was excited about the powerful recovery taking hold after the post-9/11 recession. Granted, inflation has taken a not-so-insignificant bite since then. But too much consumer angst over crashing asset values is based solely on anchoring expectations to the 2007 peak -- a period when asset values of all types, from homes to stocks, were clearly overvalued.

Why's all this important? Because 70% of our economy is based on consumer spending. Whether or not you think that's healthy or sustainable, it's reality. And as we learned the hard way last year, consumers can stop spending horrifyingly quickly when they get worried. Consumer confidence, most of it tied to net worth and asset values, is more important to America than nearly any other economy in the world.

That's why if there's one "green shoot" (sorry, I had to say it) I've felt has been encouraging, it's the doubling of consumer confidence since February. As high-profile stocks like Microsoft (NASDAQ:MSFT) and Google (NASDAQ:GOOG) really started taking off after markets bottomed in March, consumer confidence quickly followed:

Source: Capital IQ, a division of Standard & Poor's.

A consumer confidence reading in the mid-50s is hardly a sign of strength, but it's actually higher than it was last summer, before Lehman Brothers and AIG (NYSE:AIG) imploded, and banks like Bank of America (NYSE:BAC) and Citigroup (NYSE:C) started to crumble.

There's no question about it: Consumers are starting to look past the deepest scars caused by the Great Recession.

Some will say this is meaningless data that won't translate into real economic growth. But there is actually real significance here: When wealth goes up, consumer confidence goes up. When consumer confidence goes up, the willingness to spend goes up. When the willingness to spend goes up, production increases, profit comes back, and investment returns.

The economy's still a mess, and areas like banking and unemployment have a long, tough road ahead. But as Warren Buffett recently put it, "the United States economy is now out of the emergency room and appears to be on a slow path to recovery."

We'll take what we can get.

For related Foolishness:

• Know Your Numbers: Consumer Confidence
• Buffett Says It's Over
• A Pessimistic Economic Prediction