Economic Notes: Two Out of Three Ain't Bad....
3/15/2010
By Patrick O'Keefe, Director of Economic Research, J.H. Cohn
"Two out of three ain’t bad…." ~Jim Steinman
The nation’s net worth rose 1.3% in the fourth quarter (Q-4) of 2009 according to the Federal Reserve. As a result of this third consecutive quarterly gain, Americans were 11.7% wealthier than when the financial meltdown ended in March 2009.
Although substantial, the gains only partially offset the damage done by the twin meltdowns (financial and real estate) and the recession they caused.
Net worth grew in 2009’s final nine months but was still 16% less than when the recession began at the end of 2007.
Most of the March-December gains were in financial assets (87.9% of the rise), which have benefitted significantly from the Fed’s hair-of-the-dog remedy of low rates and loose money. A remedy nearing its end.
The sharp turnaround in financial markets did more than strengthen households’ balance sheets. It settled their psyches. Panic has given way to caution. Consumers have emerged from the storm shelters and gone into the shopping centers, if only tentatively.
American households’ liabilities were a tad smaller at the end of 2009. To a considerable extent the decline was due to mortgage charge-offs and, therefore, may not seem salutary. But resolution of the glut of tenuous mortgages is prerequisite to the eventual instauration of the foundation of our consumer-driven economy.
Why? Because housing deflation – now largely a function of distressed sales and foreclosures – is a drag on spending by homeowners (more than two-thirds of all households), whose house is their single largest asset. It will remain so until the overhang of questionable mortgages is substantially reduced – via default (foreclosure) or modification.
On net, the financial markets’ gains probably bolster confidence more than housing deflation weakens it, which partially explains why retail sales have surpassed year-ago levels in each of the last four months. Excluding autos, which remain volatile, sales were up in the weather-challenged month of February by 0.8% and were 4.6% greater than a year earlier.
As previously discussed, while Americans are spending more, they are decidedly not spending – or borrowing – like before.
Instead, over the course of 2009, the private sector – both households and businesses – reduced its outstanding debt to $24.5 trillion. While the cut was slight (-0.5%), it was significant nonetheless. It was the first annual decline in records back to 1945.
Where the private sector’s debt has flattened (at least temporarily), the public sector’s continues to balloon. The U.S. Treasury reports that, in February, the Federal Government’s outlays exceeded revenues by a record $220.1 billion. A one- month deficit in excess of the cumulative deficits incurred during World War II.
Continued borrowing to cover red ink of this scale will pressure rates and squeeze private borrowers as the global economy continues to expand and the Fed continues to “normalize” monetary policy. For the private sector, even those with healthy balance sheets, higher rates are on the horizon. That may not stifle the recovery, but neither will it sustain it.
On the most recent data, the household and business sectors began to address the last decade’s borrowing binge, but the “great recession” pushed Uncle Sam off the wagon. Given the circumstances, two out of three ain’t bad.
But Uncle Sam borrowed two of every three dollars that he spent in February. In this case, given the implications for economic growth, two out of three is bad.
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The statements, opinions, and conclusions contained herein are based solely upon the author’s own studies, research, and personal experience. Neither J.H. Cohn LLP nor the author makes any representation or warranty as to the accuracy or completeness of this information. J.H. Cohn LLP and the author expressly disclaim any liability for any loss or damage which may be incurred, of any kind whatsoever, as a result of or arising from the use of any of the information contained herein or reliance on the accuracy or completeness of it.