Why consumer pocketbooks had a rough start this millennium

As Americans entered a new millennium, gains in their pocketbook slowed dramatically.

Median incomes rose just 1.6 percent after inflation during the 2001-04 period, according to data released Thursday by the Federal Reserve Board. The median family net worth, a measure of wealth that represents the sum of all assets minus liabilities, rose a similarly small 1.5 percent in that period.

Gains are better than losses, but the survey confirms and amplifies a trend of wage stagnation that is continuing to dampen American paychecks into 2006.

"It is a long-term trend," says Mark Weisbrot, an economist at the Center for Economic and Policy Research in Washington, which studies the well-being of American workers and families. "Over the past 30 years, the median wage has grown about 9 or 10 percent."

The Federal Reserve survey of consumer finances comes out every three years, and represents a more detailed portrait of family finances than the monthly economic reports that come from the Department of Labor or other government agencies.

The period studied in its new survey encompassed a rocky time for the stock market, a slow-growing job market, and a rise in both home prices and family debts.

Inflation-adjusted incomes have grown so slowly, Mr. Weisbrot says, despite solid growth in productivity. A worker today is able to produce about 80 percent more, per hour of work, than his or her counterpart 30 years ago.

"Globalization is part of the process by which the bargaining power of most employees in the United States has been drastically reduced so that they don't capture most of the gains from the economy," he says.

Thanks in large measure to a rough stock market, the 2001-04 period was not necessarily a lucrative one for the richest Americans either.

The median measure of income captures the "typical" family - with half of households above and half beneath that number. It reached $43,200 in 2004, up from $42,500 in 2001.

Yet average incomes fell, in part due to a plunge in the earnings of the top 10 percent of families ranked on a scale of net worth. Essentially, they weren't able to earn as much on their assets as in 2001. It's not that managerial salaries have fallen. But the recent period hasn't been quite the booming opportunity for capital gains and stock options that the late 1990s was.

Thus, the average American family income fell from $72,400 in 2001 to $70,700 in 2004. The average income of families in the top 10 percent of net worth fell from $273,100 to $256,000 during that period.

The net worth, meanwhile, rose somewhat for families of all levels of wealth, although not as strongly as in the late 1990s.

The median, or midpoint, for net worth rose by 1.5 percent to $93,100 from 2001 to 2004. That growth was far below the 10.3 percent gain in median net worth from 1998 to 2001, a period when the stock market reached record highs before starting to decline in early 2000.

The Fed survey found that the share of Americans' financial assets invested in stocks dipped to 17.6 percent in 2004, down from 21.7 percent in 2001.

The percentage of Americans who owned stocks, either directly or through a mutual fund, fell by 3.3 percentage points to 48.6 percent in 2004, down from 51.9 percent in 2001.

Stock ownership rates were highest in 2004 among families with higher incomes and heads of households aged 55 to 64. Overall median stock holdings fell to $24,300 in 2004, down from $36,700 in 2001. With baby boomers turning 60 this year and nearing retirement, the survey found that the percentage of families with some type of tax-deferred retirement account, such as a 401(k), fell by 2.5 percentage points to 49.7 percent of all families.

However, those who had retirement accounts saw their holdings increase. The median for holdings in retirement accounts rose by 13.9 percent to $35,200.

The Fed survey found that debts as a percent of total assets rose to 15 percent in 2004, up from 12.1 percent in 2001. Mortgages to finance home purchases were by far the biggest share of total debt at 75.2 percent in 2004, unchanged from the 2001 level.

"Three key shifts in the 2001-04 period underlie the changes in net worth," said the Fed researchers involved in the study. "First, the strong appreciation of house values and a rise in the rate of homeownership produced a substantial gain in the value of holdings of residential real estate."

Second, the rate of ownership of stocks in direct and indirect forms (such as through mutual funds) declined, as did the typical amount held.

Third, the amount of debt relative to assets surged, notably debt secured by real estate. The upshot: "Families devoted more of their income to servicing debts, despite a general decline in interest rates," the researchers said.

The fraction of families with debt payments 60 days or more overdue rose substantially, mainly among people in the bottom 80 percent of the income ladder.

The Fed survey of consumer finances is conducted between May and December of every third year, and involves interviews with several thousand US families.

• Material from the Associated Press was used in this report.