WASHINGTON -- Gradually but steadily, Americans are recovering their vast loss of wealth from the recession, thanks to larger stock portfolios.
Household net worth grew 2.2 percent in the July-September quarter, fueled by a rally on Wall Street that catapulted stock prices. And stocks have risen more since the new quarter began Oct. 1, further boosting wealth.
Those increases are lifting hopes for the economy, especially because Congress seems about to pass a package of tax cuts for most Americans. Both factors help: The stock gains make people feel wealthier. And the tax cuts put more spending money in their pockets.
Consumers' confidence and access to cash are vital because their spending fuels about 70 percent of economic activity. Last quarter, Americans boosted their spending at the fastest annualized pace in nearly four years.
Net worth is the value of assets such as homes and stocks, minus debts like mortgages and credit cards. It totaled nearly $55 trillion last quarter, the Federal Reserve said Thursday. The increase from July through September occurred even though the value of people's real estate holdings sank 3.7 percent.
U.S. net worth has risen far from its bottom during the recession: $49 trillion in the first quarter of 2009. Yet it would still have to rise an additional 20 percent to regain its pre-recession peak of $66 trillion. That's a reminder of the magnitude of wealth Americans lost to the recession.
And despite the latest gains, economists think it will take at least until the middle of the decade for people to regain all their lost wealth. In part, that's because they expect homes and other real estate values in many areas to decline further.
"Home prices are going to get weaker over the next year as more foreclosed homes get dumped on the market," said Scott Hoyt, senior director of consumer economics at Moody's Analytics.
Average household wealth rose to $425,177 last quarter. Adjusted for inflation, the average U.S. household's net worth has risen nearly 8 percent from its early-2009 bottom. But it's still about 23 percent below its peak of $553,685 three years ago.
Net worth had suffered a setback in the April-June quarter, when it fell 2.6 percent. That was the first quarterly decline since early 2009. At the time, investors' fears over the European debt crisis had diminished stock portfolios.
Since then, stocks have surged. Last quarter, the value of households' stock portfolios reached $7.8 trillion. That's an increase of nearly 14 percent from the April-June quarter.
In Naugatuck, Conn., David Savage, 51, a manager of a demolition equipment company and a married father of two teenagers, has seen his family's net worth rise about 5 percent in the past year. The increase is due mostly to investment gains from mutual funds.
"I am happy to see my mutual funds finally recovering from some horrible returns over the last couple of years," Savage said.
The value of Savage's 401(k) account has risen, largely because of his employer's contributions. Yet his family's net worth is still well below where it stood before the financial crisis.
Even so, Savage plans to put some of his money to work in the stock market. "I'm looking at it as buying at a discount," he said.
Driven by its strongest September since 1939, the stock market's performance last quarter was by far its best quarterly showing in a year. The Standard & Poor's 500, a broad gauge of the market's performance, jumped 10.7 percent.
The last quarter to produce a higher return was the July-September period of 2009 -- midway through a 13-month bull rally -- when the S&P 500 soared about 17 percent.
It all translates into more money for the roughly half of U.S. households that own stocks or stock mutual funds.
Stock values gained $1.4 trillion in value during the quarter as measured by the Dow Jones U.S. Total Stock Market Index. And they've recovered $1.2 trillion more since Sept. 30. About $15 trillion is invested in U.S. stocks, based on the Dow Jones U.S. Total Stock Market Index.
The current quarter is further buoying hopes for the economy because stocks have so far risen 8 percent, with three weeks left in the year.
As much as savings were shrunk by the market's plunge in 2008 and early 2009, most investors are whole again in their retirement accounts -- thanks to higher stock prices and their continued investment in the accounts.
According to estimates by Jack VanDerhei of the Employee Benefit Research Institute, 86 percent of people with 401(k) retirement savings plans now have more money in their accounts than at the market peak in October 2007.
That figure doesn't tell the whole story, though. Recovery has been much slower for older workers, who lost more in the downturn. Nearly a third of workers with 20 or more years in retirement plans still have less money in their accounts than they did three years ago, according to the EBRI's data.
The S&P 500 remains 21 percent below its 2007 highs. Still, many analysts foresee higher stock prices as the economy improves further.
"We expect household net worth to keep its momentum," said Gregory Daco, senior economist at IHS Global Insight. "Financial gains should offset real estate losses resulting from lower housing prices and very weak sales."
The stagnant values of homes and other real estate holdings are limiting the improvement in Americans' wealth, the Fed's report showed. The value of those holdings fell 3.7 percent last quarter. That followed a scant 0.5 percent rise in the prior three months.
The outlook for housing remains dim. Homes are most people's biggest asset. But their values are still depressed in many markets. Most economists expect home prices nationally to decline 5 percent to 10 percent by the middle of next year. In some markets, declines will likely be steeper.
Most economists think consumer spending, led by the wealthy, will rise further in the months ahead. But they still don't think most shoppers, especially low- and middle- income Americans, will spend lavishly. Shrunken home equity, scant wage gains and high unemployment will keep spending in check.
More Americans are building up savings and paring debt. That's helping repair their personal finances. But it doesn't help fuel the nation's economic growth.
Consumers saved 5.8 percent of their disposable income last quarter. That was down slightly from 6.2 percent in the April-June quarter. It's still much higher than the 1-percent-plus rates just before the financial crisis.
People are steadily trimming debt. The Fed said overall household debt dipped to $13.4 trillion in the July-September period. That's a 3.5 percent drop from a peak in early 2008.
Households, on average, are carrying around $43,321 in debt, ranging from mortgages and credit cards to auto loans and home equity lines.
Debt now accounts for 122 percent of Americans' disposable income -- down from a peak of 135 percent in late 2007.
AP Business Writer Mark Jewell in Boston contributed to this report.