Monday, January 5, 2015

It's hard to get pessimistic

This has unquestionably been the weakest recovery in generations, but it's hard to get pessimistic when household finances and balance sheets are as strong as they've been in over three decades. 

Last week the Fed released its calculations of households' financial burdens (debt service and financial obligation payments relative to disposable income) as of the end of September 2014 (see chart above). By this measure, financial burdens have not increased at all for almost two years, and they are as low as they have been in over three decades. Household finances haven't been this good for a long time.

One of the defining characteristics of the current business cycle expansion has been risk aversion, which includes deleveraging. As the chart above shows, households' leverage (total liabilities divided by total assets) has declined by more than one-fourth since early 2009. That's the byproduct of zero growth in household liabilities alongside a 38% increase in assets.

And lest you think that it is just the ultra-rich getting even richer, the chart above shows that real per capita net worth has now surpassed its 2006 peak. There's been significant wealth created during this recovery, and it has not been financed by funny money or a credit boom. On the contrary, it's real. Worker productivity is up 10% and corporate profits are up about 50% from pre-recession levels.

Sure, things could be better, but they are nevertheless getting better.


Unknown said...

By the same metrics, Japan doesn't have a debt problem either. As for your net worth calculation, valuation would look a lot different in a world without negative real interest rates.

Scott Grannis said...

Contrary to your assertion, 1) real yields on TIPS today are positive across the maturity spectrum, and 2) real yields on TIPS were uniformly negative in early 2013. There has been a significant upward shift in real interest rates in the past year or so, from negative to positive.

Are you saying that rising real interest rates have artificially boosted asset valuations?

Benjamin Cole said...

The threat to the United States today is that our economy begins to mimic that of Japan and Europe.
In Japan, industrial output from 1992 to 2012 tell by 20 percent, real wages fell by 15 percent, and equities and property markets fell by 80 percent, and the yen soared, primarily due to tight money.
The threat is that tight-money advocates gain control of our central bank, or overly influence it's policy choices.

John McCormick said...

30 year low in first time home buyers... One way to improve leverage

Bad debt passed from households to banks to Fed. Are the improvements in household balance sheets equal to the deterioration in the Fed's?

Recently found your blog. Thank you, really enjoy the insight.

I have more questions than answers these days, and was surprised by the title of your post today. I see the world walking on thin ice, a mile from shore.

William said...

I think what Semper Reformanda - and I - see are the trillions of US dollars invested in money market funds, CDs, savings deposits with limited checking, US Treasury bills, shorter term corporate bonds, etc and similar assets classes in Europe and Japan which yield less than the local currency inflation rates.

In the US, one most go out the yield curve to 5 years to get a Treasury yield of 1.5% or a US CD yield of 1.53%. In the UK a 5 year treasury earns 1.0% but in Germany and Japan their 5 year yield is only 0.01% !!

In sum total such negatively yielding assets dwarf the US TIPS market and have a huge negative impact on savers, be they individuals, retirement plans or insurance companies. Meanwhile major governments are borrowing shorter term for free.

Nudge said...

"And lest you think that it is just the ultra-rich getting even richer, the chart above shows that real per capita net worth has now surpassed its 2006 peak."

What are you talking about? Any "per capita" measure does not correct for the very skewed distribution of wealth and income. Show this using median measures instead and maybe I won't be able to laugh in your face.

William said...

U.S. Steel Cuts Jobs as Oil Drops

Citing the collapse in global oil prices, U.S. Steel will idle its plant in Lorain, Ohio, laying off 614 workers, a company spokeswoman said Tuesday.

steve said...

the trouble with these charts is they are rear view mirror oriented-which is largely why economists predictions are so pathetically bad (present company excluded of course). the world wide BOND market is strongly asserting DEflation and IF correct that cannot be good. not pessimistic just realistic.

Scott Grannis said...

steve: the global bond markets are not strongly predicting or asserting deflation. The U.S. bond market is priced to CPI inflation averaging 1.2% a year for the next 5 years. The Japanese bond market is priced to CPI inflation of roughly zero over the next 5 years. The German bond market is priced to CPI inflation averaging -0.25% over the next 5 years.

The major reason for the currently low expected inflation rates is falling oil prices. Core inflation, which excludes energy, is not expected to decline much from current levels.

And in any event, what's wrong with a little deflation? The media has hyped the "Japanese deflationary black hole" story so much that it's time to take a deep breath and question this widely held assumption.

Deflation is not necessarily dangerous. It's bad for those who are overly indebted, but as the U.S. numbers show, households are in much better shape today to handle a little deflation.

A little deflation is not a problem, just as a little inflation is not a problem. Lots of either, of course, would be bad, but that's a story for another day.

Benjamin Cole said...

Scott Grannis: a "little deflation" had terrible results in Japan over a 20-year period. I do not think the press hyped that, I think the press is unaware of how corrosive deflation was in Japan.

Scott Grannis said...

Re Japan's deflation: it's largely a myth that Japan has suffered from deflation. To begin with, Japan's consumer price index is unchanged today from where it was 18 years ago, and it is up slightly relative to where it was 20 years ago. In essence Japan has had zero inflation for the past two decades.

That the lack of inflation has coincided with relatively weak economic growth (0.7% annualized for the past 20 years) does not mean that low inflation was the cause of weak growth. Japan has many other things which have more likely contributed to weak growth, chief among them being excessive government spending.

Scott Grannis said...

Another reason for weak growth in Japan: the workforce (number of people employed) has shrunk. Over the past 20 years the workforce has declined at a 0.1% annualized pace. That compares to a 1% annualized increase in the U.S. over the same period.

Nudge said...

Japan's deflation is driven by their population shrinking and aging. Their standard of living (i.e. *per-capita* GDP) has improved and is one of the highest in the world.