Friday, June 21, 2019

At least households are in good shape

The world is fixated on tariffs, weakened economies, China, central bank policies, low interest rates, high equity prices, and the possibility of a looming recession. Lots of things to worry about, and no one can confidently predict the future at this point. Too many variables, some of which are political. So I thought I would briefly change the subject and talk about the financial health of the household sector of the US economy, which is actually quite good. (all charts contain latest data as of Q1/19)

Chart #1

Chart #1 shows households' financial burdens, which are defined as monthly debt service payments as a percent of disposable income. This is a robust measure of debt burdens since it compares a flow (debt payments) to a flow (income). By this measure, households' debt burdens are at historically low levels, and have been for a number of years. No sign here of excessive borrowing, as there was prior to the past three recessions.

Chart #2

Chart #2 compares a stock (liabilities) to a stock (assets), and by this measure household leverage is as low as it has been since the mid-1980s.

Chart #3

Household net worth (Chart #3) has reached another all-time high: $109 trillion. This has been achieved primarily by increased savings and investments in both stocks and bonds. Home price appreciation has played only a minor role, since the value of households' real estate holdings has appreciated less than 20% since the housing price peak of 2006. At the same time, total debt has increased by only 10% since 2007. If only our government could be so frugal!

Chart #4

Chart #4 shows the inflation-adjusted value of household net worth, which has also reached an all-time high. It's important to note that this measure of financial well-being has been increasing by about 3.6% per year for many decades. Recent gains are almost exactly in line with historical experience. Nothing unusual or unsustainable about this.

Chart #5

Chart #5 shows the inflation-adjusted, per capita level of net worth, which is also at an all-time high ($329K per person). Note that this too has been growing at close to its long-term trend rate of about 2.3% per year. That growth rate is only slightly higher than the 2% annualized increase in labor productivity since 1950. That makes sense: living standards can only rise if we work harder and more efficiently, and that in turn requires investments of time and money (i.e., capital).

Chart #6

Federal debt owed to the public (currently $16.2 trillion) has been soaring by virtually any measure (see Chart #6). As a percent of GDP, federal debt is approaching 80%, the highest level since the early 1950s. It's worth noting that, contrary to what many might think, rising debt burdens do not necessarily translate into higher interest rates. If anything, there appears to be an inverse correlation between debt burdens and interest rates.

Chart #7

When compared to household net worth, federal debt has actually been declining for the past 6-7 years (see Chart #7). The current level (15%) may be high, but it's not beyond the range of believable: if we all wrote a check to the government for 15% of our net worth—a painful thought, but not a killer—federal debt would disappear.