WASHINGTON - The stock market rallied to record heights last month, home prices have rebounded and the wealth of American households returned to where it was before the Great Recession.
That's just what Federal Reserve Chairman Ben Bernanke said he wanted when the Fed announced a third round of bond purchases last September.
The purchases weren't just meant to push interest rates down and make it cheaper for businesses and consumers to borrow - the traditional aim of the Fed's easy money policies. They were also designed to pump up stock and house prices, making Americans feel richer and more willing to spend - a process economists call the "wealth effect."
But the wealth effect may not have had the economic impact Bernanke hoped it would. Sure, the Dow Jones industrial average is up 11 percent since the bond-buying policy was announced in mid-September, despite plummeting Wednesday and Thursday on news that the Fed could end the purchases by the middle of 2014. And overall household wealth hit $70.3 trillion at the end of March, regaining the $12.7 trillion lost in the recession.
But Americans still aren't shopping with enough gusto to add much momentum to the economy. Consumer spending actually fell in April from March. And economic output - 70 percent of which comes from consumer spending - is expected to grow at an annual rate of just 2 percent from April through June, down from a 2.4 percent rate the first three months of 2013.
Why aren't the impressive increases in wealth helping the economy bounce back as briskly as it normally does four years after a recession?
Economists cite several reasons. The biggest gains aren't going to the vast majority of Americans. Many families are still nursing big losses on the value of their home, and the big drop in home prices from 2006 through 2011 has undermined their confidence. Moreover, their incomes have been crimped by a weak labor market and tax hikes that took effect in January.
The biggest gains in wealth are going to wealthy households that tend to save a big chunk of their incomes and spend a smaller proportion on basics such as food and clothing. "Those guys don't spend much," says economist Edward Wolff of New York University.
The disparity shows up in numbers Wolff calculated. He found that the average U.S. household's net worth rose this year to $522,000. But the average is skewed higher by the vast net worth of America's wealthiest - Bill Gates' $67 billion, for instance, according to Forbes magazine.
So Wolff looked at the net worth of the median U.S. household - those smack in the middle, where half of households earn more and half less. The median family's net worth is far more modest than the average: $61,000, Wolff estimates. That is $50,800, or 47 percent, short of where it was in 2007.
One reason: The biggest gains have come from the rise in financial markets. And the benefits of the stock market's surge have gone disproportionately to America's wealthiest households. Wolff calculates that the wealthiest 10 percent of U.S. households own more than 80 percent of stocks, even including retirement accounts such as 401 (k) plans. "The recent stock market boom has really benefited just the top," Wolff says.
The wealth effect from gains in financial markets is much weaker than the effect from gains in housing wealth: A $1 increase in housing wealth generates about 8 cents of consumer spending. A $1 rise in stock wealth generates 3 cents. And a $1 rise in bond wealth generates less than 1 cent, says Mark Zandi, chief economist at Moody's Analytics.
Housing has a bigger bang for the buck because it is the main source of wealth for middle-class families, and they spend almost all their earnings. Bonds and stocks tend to be held by the wealthy, who spend a smaller share of theirs.
But housing isn't helping much yet - even though home prices are bouncing back from a devastating real estate bust. Many Americans still haven't seen the value of their home fully recover. Nearly 1 in 5 homes are worth less than the mortgages on it, CoreLogic reports. According to the Fed, overall homeowners' equity, worth nearly $9.1 trillion on March 31, is still $4 trillion, or 31 percent, lower than it was at the end of 2005.
As a result, many homeowners don't feel much wealthier than when the Fed started its rounds of bond purchases. Many can't take advantage of the super-low rates Bernanke engineered to refinance their mortgage and lower their monthly payments - let alone to take cash out of their home equity to splurge on goods the way Americans did in the mid-2000s.
Mortgage giant Freddie Mac says homeowners took out just $8.1 billion in cash when they refinanced mortgages in the first three months of 2013. From April through June 2006, at the height of the housing boom, they cashed out $84 billion.
For ordinary Americans, any gains in wealth have been partially offset by losses in income. According to Sentier Research, median household income in April was $51,456, nearly 7 percent lower when adjusted for inflation than it was when the Great Recession began in December 2007.
Americans' wallets were also pinched in January by an increase in the Social Security tax. The hike amounts to $1,000 a year for a family earning $50,000.
For all these reasons, the wealth effect "has grown more muted," Zandi says. In the past, a $1 increase in net worth overall could boost consumer spending by about 5 cents. These days, Zandi calculates, $1 in increased wealth generates just 2 cents to 2.5 cents in spending.
And generating wealth may be even harder if the Fed goes ahead with plans to scale back and eventually end its bond purchases. The stock market has taken a beating since the Fed revealed the news Wednesday: The Dow dropped 206 points Wednesday and 353 points Thursday before bouncing back 41 points to close at 14,799 Friday.