The Federal Reserve released its third quarter flow of funds account. I have never been so anxious to get a release as I was today for the flow of funds account. Third quarter highlights GO something like this:
- Household net worth declined 4.7%
- Household debt decreased an annualized 0.8% - a sign of real delevering, given that the 0.8% contraction is in nominal terms and prices rose 1.6% over the same quarter.
- Total business debt decelerated to a 2.94% pace (down from 5.6%).
- Federal debt grew an annualized 39% in the third quarter, which is 33.5% above the average 5.5% quarterly debt growth from q2 2007 to q2 2008. This is the biggest surge since 1952.
The chart illustrates the ratio of household net worth to disposable personal income spanning 1952:Q1 to 2008:Q3. In the third quarter, the share of net worth fell to 5.3% times current disposable income, driven by falling equity and home values. Consumer wealth is falling, and unless housing and equity markets stabilize and grow SOON, wealth will likely fall for two more quarters…at least.
The continuous decline in net worth is likely to hammer consumption, and with that, GDP. It seems like the wealth effect – which is previously questionable as an empirical determinant of consumption – is now quite strong.
Households are watching their stock of housing wealth fall when they return home from work, when they turn on the TV, and when they sit down for dinner. Everyone is facing a deterioration in wealth – home and equity owners alike – and this time around, consumption is bound to decline…further.
There is some serious slack building in this economy. Go Policymakers~!