Thursday, June 7, 2018

Household leverage hits a 30-yr low, net worth exceeds $100 trillion

Today the Fed released its Q1/18 estimates for Household Net Worth and related measures of prosperity. Of note, households' leverage (liabilities as a % of total assets) fell to a 30-yr low, and households' net worth hit hit a new all-time high in nominal, real, and per capita terms. Total household net worth now exceeds $100 trillion, up almost 50% from pre-2008 highs, whereas liabilities are up only 6% from their Great Recession highs. Housing values have increased by about 13% since their 2006 bubble high, but are still about 7% lower in real terms. Households have been busy deleveraging, saving, and investing, and the housing market is back on its feet and healthy. Major trends are all virtuous and consistent with past experience.

Chart #1

As Chart #1 shows, private sector (households and non-profit organizations) leverage (liabilities as a percent of total assets) has now fallen fully 35% from its early 2009 high, and has returned to levels last seen in late 1987, when the economy was in full bloom. Our federal government, in contrast and unfortunately, has borrowed with abandon, raising the burden of federal debt (federal debt owed to the public, as a percent of GDP) from 44% to 77% over the same 31-year period.

Chart #2

Chart #2 summarizes the evolution of aggregate household balance sheets. Note the very modest increase in liabilities over the past decade, the gradual recovery of the real estate market, and the strong gains in financial assets, driven by increased savings and rising equity prices.

Chart #3

Chart #3 shows the long-term trend of real net worth, which has risen on average by about 3.5% per year over the past 66 years. Note that recent levels of real net worth do not appear to have diverged appreciably from this long-term trend. That wasn't the case in 2000 or 2007 however, when stocks were in what we now know was a valuation "bubble."

Chart #4

Chart #4 shows real net worth per capita. The average person in the U.S. today is worth about $308K, and that figure has been increasing by about 2.2% per year, adjusted for inflation, for the past 67 years. (Note: the difference in the trends of Chart #3 and #4, 1.3%, is the average rate of population growth.)

To be sure, there are lots of mega-billionaires these days who are skewing the statistics upward, but that doesn't imply that the average person's living standards may have declined. A person making an average income in the U.S. enjoys all the advantages that our nation's net worth has created. Regardless of who owns the country's wealth, everyone benefits from the infrastructure, the equipment, the computers, the offices, the homes, the factories, the research facilities, the workers, the teachers, the families, the software, and the brains that sit in homes and offices all over the country and arrange the affairs of the nation so as to produce $20 trillion of income per year. Ask yourself: Would the average wage-earner in the U.S. enjoy the same quality of life if he or she earned the same amount while living in a poor country? I seriously doubt it.

(Apologies for the two-week absence of posts; we were enjoying some time in Tuscany and Amalfi. It's hard to get concerned about world events in such tranquil settings. Fortunately, the overall picture seems to have improved since we left, notwithstanding a brief scare over the possibility of Italy leaving the euro—a risk that seems quite unlikely in my view.)


marcusbalbus said...

head back. these are aggregate numbers. over 90% of american's are worse off. all the
"wealth" went to the top. the vast majority of the "wealth" is financial assets.

tom said...

Thanks Scott, welcome back! Thoughts on the chemical index similar to truck tonnage?

Scott Grannis said...

The Chemical Activity Barometer is fundamentally different from truck tonnage. According to the ACC: "The Chemical Activity Barometer has four primary components, each consisting of a variety of indicators: 1) production; 2) equity prices; 3) product prices; and 4) inventories and other indicators." So it contains a lot of stuff that is not physical (eg, equity prices, product prices). It has been rising at roughly a 4% pace since late 2016. It has correctly foreshadowed a pickup in industrial production and a general firming in economic activity, but it doesn't appear to have the same surge as the truck tonnage stats. In fact, it's growth rate appears to have moderated a tiny bit in recent months.

Benjamin Cole said...

Per usual, great post, love the numbered charts.

Love the Amalfi coast.

ckhajavi said...

Welcome back Scott - hope you had a wonderful trip - I’ve been amazed at how strong the consumer data is - even a company like target that is up against massive competition from amazon is running mid single digit comp store sales - regardless us bond yields have collapsed due to the Italian issues / emerging market stress / recent dollar strength - all seem like temporary issues so would assume rates could move higher from these levels - thanks again for the great posts Scott - talk soon