1. Household Wealth Hits New All-time High
2. Great News But the Economy is Still Sluggish
3. US Economy “Growth Deficit” Hits $1.31 Trillion
4. February Employment Report Better But Not Good
The Federal Reserve announced last Thursday that US household net worth reached a new record high by the end of last year – at $80.7 trillion. The Fed said the new record was made possible largely due to vaulting stock prices, increased home values and Americans paying off more of their debts.
Much of the surge in net worth went to affluent families and older Americans. Both groups are less likely to spend their gains and more likely to save and build more net worth – which is not particularly good for the economy unless it translates into new jobs.
Meanwhile, many Americans continue to pay down their debts, a trend referred to as “deleveraging.” Total household debt fell from near $13 trillion in 2008 to just under $11 trillion in 2012. For better or worse, that trend seems to have reversed in 2013 as more Americans started to take on debt again. We’ll discuss the details as we go along today.
We also take a look at why the economic recovery is still sluggish, some four years after it officially began. Specifically, we’ll compare the current recovery with the average of the last 10 economic recoveries to determine the size of our so-called “growth deficit.”
Household Wealth Hits New All-time High
Americans’ collective wealth hit the highest level ever at the end of last year, according to data released last Thursday, reflecting a surge in the value of stocks and homes that has boosted the net worth of many US households.
The net worth of US households and nonprofit organizations rose 14% last year, or almost $10 trillion, to $80.7 trillion, the highest on record, according to the latest Federal Reserve report. Even adjusted for inflation, the Fed’s preferred gauge of prices, US household net worth – the value of homes, stocks and other assets, minus debts and other liabilities – hit a new record.
The Fed report shows Americans have made considerable progress in repairing the damage inflicted by the housing crash and recession, which ran from December 2007 through June 2009 and decimated the wealth of a wide swath of the nation. Yet as of December 31, 2013 the net worth of the nation has vaulted to the highest level ever recorded by a sizable margin above the previous high in 2007.
Driving much of the past year’s gains was the record-setting rally in the US stock markets, which saw the Standard & Poor’s 500 Index soar over 32% (including dividends) last year. The increase in stock prices has disproportionately benefited affluent Americans, who are more likely to own shares. The value of stocks and mutual funds owned by US households rose a whopping $5.6 trillion last year.
Holdings of stocks and bonds as a share of overall net worth, at 35%, is at the highest level since the dot-com bubble burst in 2000, Fed data show. That means that even as wealth increases, it’s increasingly going to the affluent. The media complain almost daily about “income inequality,” but it’s really nothing new.
In addition to the affluent, much of the wealth surge is going to older Americans. Both groups are less likely to spend their gains and more likely to save and build net worth. Meanwhile, sheer demographics – the retirement of the Baby Boomers and America’s aging population – are increasing the ranks of the nation’s savers.
The improving housing market also boosted household wealth. The S&P/Case-Shiller national home-price index rose 11.3% in the 4Q of last year from the same period in 2012. That’s the biggest year-over-year advance in home prices since the first three months of 2006, eight years ago.
Household real estate assets climbed by $401.1 billion in 2013, the data show. Owners’ home equity as a share of total household real estate holdings increased to 51.7% last quarter from 50.6% in the previous three months. That’s up from a record low of 36.5% in the first three months of 2009.
Great News But the Economy is Still Sluggish
You’re probably wondering, what with household wealth at a new record high, why is the economy not doing better. That’s a great question.
Following the financial crisis and recession of late 2007-early 2009, the ensuing economic recovery has been the weakest rebound since the Great Depression. As I reported last week, the Congressional Budget Office revised its economic growth number to only 1.9% for 2013. That’s hardly a robust recovery. So what did the latest Fed report have to say about that?
The Fed’s report last week on household wealth did include some analysis on why the recovery has not been stronger. One reason the economic recovery has been so weak since the end of the recession is that many Americans have been digging out of a mountain of debt.
As you can see in the chart below, total household debt – including mortgages, credit cards, student loans and car loans – soared to almost $13 trillion in 2008. Since that peak, total consumer debt declined to just under$11 trillion in late 2012. Rather than spending and taking on more debt, many Americans have been paying off their loans and credit card balances.
We’ve all heard the term “deleveraging” over the last few years. In this context, deleveraging means that consumers have been paying down their debts, rather than taking on more, since the recession. That has meant slower growth in consumer spending which accounts for apprx. 70% of GDP.
According to the Fed report last Thursday, total US household debt was about 109% of disposable income at the end of last year, down from a peak burden of 135% in late 2007. This more manageable debt burden could prompt American households to begin to borrow and spend more later this year, even though the job market remains sluggish and income growth weak.
And we can see this increase in the chart above in the last two bars showing households taking on more debt late last year. In the 4Q of last year, total household debt rose to $11.52 trillion, according to the Fed’s latest data.
Indeed, overall household borrowing rose an annualized 0.9% last year, the biggest percentage rise since 2007. Last year also saw the smallest decline in mortgage debt since 2008, a sign that fewer Americans are entering foreclosure and more are taking out new mortgages. Other types of consumer credit grew 6% last year, though much of these gains were due to student loans.
As I have written numerous times before, the financial crisis and severe recession of late 2007-early 2009 scared the wits out of millions of Americans, many of whom lost their jobs. As a result, it will likely be several more years before consumers are willing to take on significantly more debt and resume their pre-crisis spending habits, if ever.
Let me be clear: I am not in favor of Americans taking on more debt; in fact, I wish Americans would continue to reduce their debt burdens by deleveraging and saving more for retirement – which the data suggest they won’t. In the short-run, if Americans resume taking on more debt, it will be good for the economy in terms of consumer spending. But in the long-run, it will be a disaster at some point. Ditto for Uncle Sam!
Despite that warning, the data in the chart above indicate that the trend toward lower consumer debt is starting to reverse itself. And borrowers are also showing that they can handle the increased debt balances, as overall delinquency rates continued to drop. As of the end of 2013, 7.1% of outstanding debt was in some stage of delinquency, down from 7.4% at the end of the 3Q.
The bottom line is that the latest data suggest that more Americans are once again willing to take on additional debt, but we’re not likely to go back to pre-crisis levels. Meanwhile, millions of other Americans are still working to pay down their debts.
As a result, we should not expect robust economic growth anytime soon. More likely, we will continue to see annual GDP growth of less than 3% generally for the next couple of years, and that assumes no more significant negative surprises.
US Economy “Growth Deficit” Hits $1.31 Trillion
As I have reported before, the Commerce Department released its second estimate of 4Q economic growth and for all of 2013. The advance estimate of 4Q GDP was a respectable 3.2% but the second estimate fell to only 2.4%. For all of 2013, the Commerce Dept. reported growth of just 1.9%. That followed growth of only 2.8% in 2012, 1.8% in 2011 and 2.8% in 2010.
We’ve all seen comments noting how this is the weakest economic recovery since the Depression. Some analysts at Investor’s Business Daily decided to quantify just how weak this recovery is as compared to the average growth following the last 10 recessions, and here’s what they found.
If this had been only an average recovery, we'd be $1.31 trillionricher.
The government reported that GDP grew to a total of $17.081 trillion at the end of 2013. If the economy had grown at the average rate of the last 10 recoveries, GDP would be at $18.381 trillion.
I remember there being a lot of optimism about the economy ramping-up last year. Most forecasters were predicting GDP growth of at least 3% for 2013. Yet annual growth in GDP has never been above 3% during Obama’s presidency.
By comparison, it never fell below 3% during the Reagan recovery. And in the nine years following the 1990-91 recession, GDP grew faster than 3% in all but two of those years.
Looked at another way, 7.5 million more people would have jobs today if the economy had grown by only the average of the last 10 recoveries.
President Obama rationalizes that recoveries from financial crises are always slower. While that may be true to an extent, this recovery is now four years old. His other excuses include: the near $1 trillion stimulus wasn’t big enough; the tsunami in Japan; the debt crisis in Greece; and protests across the Middle East.
In addition, he blamed the Republicans last year for threatening to default on the debt and imposing across-the-board spending cuts. Later it was the expiring unemployment benefits and “cuts” in food stamps. Now he blames the weather, despite the fact that temperatures and precipitation were close to average in the 4Q. And we saw slowdowns in some areas that weren’t affected by the cold weather.
In late 2013, President Obama was predicting “breakout growth” for 2014. Yet many forecasters now believe that 1Q GDP growth will be less than 2%. The advance report on 1Q GDP doesn’t come out until the end of April.
February Employment Report Better But Not Good
Employers added more workers than estimated in February, an indication that the US economy may be starting to shake off the effects of the severe winter weather that slowed late last year and earlier this year. Friday’s report from the BLS showed that 175,000 new jobs were created in February, well above expectations and the revised 129,000 new jobs in January.
The headline unemployment rate rose to 6.7% in February from 6.6% in January as the number of people joining the workforce outpaced the quantity of jobs available. The media, of course, went ga-ga over the better than expected jobs report. But was it really that good?
As you can see above, the last three months have seen the weakest job growth in the last year, despite the higher than expected jump in February. Monthly job growth averaged 194,000 in 2013, so this year is certainly not off to a good start. Hopefully, that will change as the weather warms up.
The total number of out-of-work Americans held steady at about 10.5 million last month, the BLS reported. The labor force participation rate, a key gauge of the percentage of working-age Americans currently employed, held steady at 63%, its lowest level in four decades.
The unemployment rate at 6.7% remains near its lowest level since the onset of the 2008 financial crisis but often for the wrong reasons. That’s because thousands of people have been leaving the workforce each month, which reduces the number of people the government counts as unemployed.
The stronger-than-expected February jobs data will undoubtedly strengthen the Fed’s case for continuing its plan to scale back quantitative easing (QE). Despite a weak January jobs report, Fed policy makers voted unanimously earlier this year to continue reducing the central bank’s monthly bond purchases by $10 billion per meeting. The QE purchases have been whittled down to $65 billion a month.
In public comments, Fed members have said the economic data would have to significantly weaken for the Fed to alter its stated objective of reducing bond purchases at $10 billion intervals until the program is expected to end later this year.
The Fed Open Market Committee will meet next Tuesday and Wednesday, March 18-19. It is widely expected that the Committee will vote to reduce monthly QE purchases by another $10 billion at next week’s meeting.
Gary D. Halbert
Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert, Mike Posey (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.