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Do You Feel $2.95 Trillion Richer? The Fed Says You Are

By Dan Caplinger – Mar 7, 2014 at 12:30PM

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The latest Federal Reserve report on total U.S. net worth rose to $80.7 trillion in the fourth quarter. Did you get your share?

We already knew that last year's fourth quarter was a strong one for the Dow Jones Industrials (^DJI 0.92%), with the average jumping by almost 10% and capping an impressive performance throughout 2013. But what many might not realize is the role that stock market gains played in boosting overall household wealth in the U.S., as the Federal Reserve said that rising stock values helped to increase the nation's net worth to record levels.

Measuring net worth
Every quarter, the Fed comes out with a statistical release giving detailed data on American wealth. In the fourth quarter of 2013, household net worth soared to $80.66 trillion, a rise of $2.95 trillion, or 3.8%, according to figures released Thursday. That was the fastest rate of gain since the first quarter, and it closed out a year in which net worth climbed by $9.8 trillion. At almost 14%, 2013's pace of growth was the highest since 2004.

Federal Reserve Board Building. Image source: Wikimedia Commons.

Fortunately for investors, gains in the financial markets represented a huge portion of the rise in net worth last year. Of that $9.8 trillion total increase, $5.6 trillion came from the rise in the value of the stocks and mutual funds that households owned. In addition, the increase in real-estate values also contributed a big piece of rising net worth for Americans. The Fed report tied almost a quarter of the increase in 2013, or $2.3 trillion, to residential real estate.

One key question, though, is how those gains were allocated across the population. Obviously, with investment gains driving much of the overall increase in wealth, households that don't own any investments missed out on the opportunity to boost their net worth. Yet it also pointed to the need for investors to take a more aggressive stance with their investments, as those who concentrated solely on bonds likely didn't get their fair share of the gains.

Sluggish personal borrowing continues
Meanwhile, on the other end of the personal balance sheet, overall nonfinancial debt levels rose at an annualized rate of 5.4%, but households contributed only a very small portion of that growth. Fed data showed household annualized debt growth of just 0.4% in the fourth quarter and 0.9% for the full year. By contrast, business and federal government borrowing continued at elevated levels, with business debt growing at an annualized 7.1% and federal borrowing soaring 11.6%. State and local governments continued their trend toward austerity, though, with a plunge of 4.9% on an annualized basis in the fourth quarter.

Borrowing trends play a key role in the health of the overall economy. For instance, even though homebuilders Toll Brothers (TOL 2.35%) and PulteGroup (PHM 2.20%) posted reasonable share-price gains last year on the strength of rising home prices, the pace of gains in the homebuilding sector was slower in 2013 than in 2012. Moreover, as signs of sluggishness in the home sector appeared and interest rates rose, mortgage lenders Bank of America (BAC 0.63%), Citigroup (C 1.50%), and many of their peers started to see pressure from declining mortgage-refinancing activity, and some fear that falling purchase activity could be the next step.

Get your fair share
In the end, what the Fed's latest net worth report shows is that when times are good, investing is a key element of financial success. Without investing, you'll leave yourself less able to benefit from boom times in the U.S. economy and the stock market.

Dan Caplinger owns warrants on Bank of America. The Motley Fool recommends Bank of America. The Motley Fool owns shares of Bank of America and Citigroup. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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