Americans net worth declined by $1.7 trillion in Q1 2008 - - the biggest drop in wealth since 2002 - - as declining home prices and a sluggish stock market took a toll on portfolios and asset holdings, CNNMoney.com reported Friday.

U.S. household net worth fell 3% to $56 trillion at the end of March, according to the U.S. Federal Reserve's flow of funds report, CNNMoney.com reported, with the amount of home equity declining to 46.2% - - the lowest on record.

Economist Peter Dawson told BloggingStocks Friday the net worth and home equity statistics aren't surprising, given the U.S. economy's current fundamentals. Further, he said the economy is now approaching "the danger level" regarding several key economic metrics.

Trends moving in wrong direction

"The two biggest concerns for the economy right now are a lack of job growth across the spectrum and stagnant wages for segments of the American workforce. A lack of job growth and wage increases will put the U.S. economy in a very serious state, and not just with home values, if the current trends do not reverse," Dawson said.
Moreover, Dawson said he's less concerned about home equity and overall home values, because "a home is a derivative asset, really a function of job growth, wage gains, and rising real incomes."

"The key remains job growth, and the ability of all employees to secure the wage gains that are essential to a growing economy. Some have argued that the U.S. economy could compensate for a lack of consumption at home by simply selling more goods to consumers abroad, but this is a deeply flawed model," Dawson said. "Absent consumption at home, the U.S. economy will fall into a prolonged recession, and the key to consumption is job growth and wage increases. Without job growth and wage increases the United States will simply run out of consumers. You'll be a condition where there are plenty of goods in the stores but there will not be nearly enough consumers to buy them. That's a place the nation doesn't want to be in."

The Federal Reserve yesterday released statistics showing that for all of 2007, household net worth rose 3.4% to $57.7 trillion, the slowest growth in five years. After the effects of 4.1% inflation are included, real net worth fell for the year.

Despite these figures, I think we need to put things in perspective. After all, economic growth is cyclical and as such from time to time as the economy weakens, household net worth will decrease. It happened 5 years ago. It's not as if households lost 20-30% of their net worth. After factoring in inflation, the decrease was less than 1%. The US is still by far the wealthiest nation on earth and Americans have the highest standard of living of any people on earth. That's why there is an immigration problem. People from around the world will do whatever it takes to get to the US. So if their wealth drops minimally, I don't think it's such a big deal.

The pessimists can complain that things are bad and if you listen to them the economy will never recover.

Things have been bad before and they have always recovered.

Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. DISCLOSURE: Writer's fund has no positions in any stock mentioned as of 3/07/08