Q4 2010 Flow of Funds: Household leverage down, wealth effect dead, and equities surge
The Federal Reserve released the Q4 2010 Flow of Funds Accounts for the US. On the household balance sheet, net worth (total assets minus total liabilities) was estimated at $56.8 trillion, which is up $2.1 trillion over the quarter. Notably, household net worth has increased $6.4 trillion since the recession’s end (Q2 2009). Moreover, personal disposable income increased another $918 billion over the quarter, which dropped household leverage (total liabilities/disposable income) 1.1% to 116%.
Personal saving as a percentage of disposable income rose markedly in Q4 2010 to 10.9% (based on the BEA’s measurement of saving using flow of funds data – see Table F.10, lines 49-52).
The chart above illustrates the the wealth effect – the wealth effect is the propensity to consume (save) as wealth increases/decreases. In the Flow of Funds data, this is best approximated by the ratio of net worth (wealth) to disposable income. In Q4 2010, wealth rose 0.15 times disposable income to 4.9, while the saving rate surged 6 pps to 10.9%.
I conclude from the near-term times series illustrated above, that the wealth effect is very weak, and the incentive to save outweighs the desire to consume one’s wealth. Better put: households are increasing consumption, but that’s due to increased income not wealth.
Of note, since 1997 the volatility of household net worth to disposable income is near 2.5 times that which preceded 1997. Households are fed up; and at least for the time being, the positive wealth effect may be effectively dead.
As an aside, I put something out there: the ‘measure’ of saving is becoming increasingly unreliable. Spanning the years 2008-current, the average discrepancy between the Flow of Funds measure of saving and the BEA’s measure of the same definition of saving (the NIPA construction) is more than 2 times what it was in the 2 years leading up to the recession. This is worth more investigation; but historically, the FOF measure (the change in net worth) has been more reliable.
Breaking down household assets from liabilities, you see what’s driven most of the cumulative gain in net worth: financial assets, which are up near 16% since the recession’s end. During the recovery to Q4 2010, pension fund assets are up 22%; mutual fund holdings gained 32%; and here’s the Fed’s baby, corporate equities (stocks) surged 41% (and more, of course, since this data is truncated at December 2010). Credit market instruments are up 6%.
The asset gains outweigh the drop in liabilities, as mortgages and consumer credit have dropped near 4% and 2%, respectively, since the end of the recession. Consumer credit is making a comeback, though, growing 1% over the quarter, while households continue to reduce mortgage liabilities.
I will comment sometime over the weekend or next week about corporate excess saving, which also is constructed using the Flow of Funds data.
Rebecca Wilder
“As an aside, I put something out there: the ‘measure’ of saving is becoming increasingly unreliable.”
The American Republic is like a bunch of cows to the Salt lick, accepting the demise of their freedoms at the behest of the Republicans.
Are many of the Republicans, gay, fighting against their Man Queer urges?
I think they mayt be.
“As an aside, I put something out there: the ‘measure’ of saving is becoming increasingly unreliable.”
The American Republic is like a bunch of cows to the Salt lick, accepting the demise of their freedoms at the behest of the Republicans.
Are many of the Republicans, gay, fighting against their Man Queer urges?
I think they mayt be.
“As an aside, I put something out there: the ‘measure’ of saving is becoming increasingly unreliable.”
The American Republic is like a bunch of cows to the Salt lick, accepting the demise of their freedoms at the behest of the Republicans.
Are many of the Republicans, gay, fighting against their Man Queer urges?
I think they mayt be.
Rebecca – “Personal saving as a percentage of disposable income rose markedly in Q4 2010 to 10.9% (based on the BEA’s measurement of saving using flow of funds data – see Table F.10, lines 49-52).”
That puts U.S. households back in alignment with the savings as a percentage of disposable income evidenced during the period 1964-1987.
That’s where U.S. households need to be operating their budgets in my judgment.
Hi MG,
German saving rates are ridiculously high, over 10% (11.3% in 2009, for comparison). I suppose if we use the German economy as a model to replicate, given that they are export drive and big savers, I suppose that 10.9% is not unreasonable. I saw ridiculous bc the health of the Eurozone depends on Germany dissaving somewhat and running smaller surpluses so that the weaker Periphery economies can successfully increase saving under the one monetary roof that is the euro system.
But I find this number to be unreliable at this time, given its sharp divergence from other measures of saving. Something’s amiss in the macro data.
Rebecca
Rebecca
Hi MG,
German saving rates are ridiculously high, over 10% (11.3% in 2009, for comparison). I suppose if we use the German economy as a model to replicate, given that they are export driven and big savers, I suppose that 10.9% is not unreasonable. I said’ridiculous’ bc the health of the Eurozone depends on Germany dissaving somewhat and running current account deficits so that the weaker Periphery economies can successfully increase saving under the one monetary roof that is the euro system.
But I find this number to be unreliable at this time, given its sharp divergence from other measures of saving. Something’s amiss in the macro data.
Rebecca
Rebecca – Did Krugman’s post help with this? http://nyti.ms/eHdHVh
FRauncher,
I think that you are accusing me of plagiarizing Paul Krugman’s work?
Notice the publication date for my article:
Posted by Rebecca Wilder | 3/10/2011 09:00:00 PM
And notice the publication date for Krugman’s article:
March 12, 2011, 7:16 am
I copied the dates straight from the websites, which is why they are in html format. Clearly Krugman’s post ‘help with this’ – perhaps it’s the other way around? And no, I didn’t get ‘help’ from Calculated Risk. I just know how to read the Flow of Funds.
Rebecca
FRauncher,
I think that you are accusing me of plagiarizing Paul Krugman’s work?
Notice the publication date for my article:
Posted by Rebecca Wilder | 3/10/2011 09:00:00 PM
And notice the publication date for Krugman’s article:
March 12, 2011, 7:16 am
I copied the dates straight from the websites, which is why they are in html format. Clearly Krugman’s post didn’t ‘help with this’ – perhaps it’s the other way around? And no, I didn’t get ‘help’ from Calculated Risk (which he focuses on leverage only). I just know how to read the Flow of Funds.
Rebecca
It actually could have helped Krugman, but he usually attributes to us. Which means he checks in also. Drivebys are usually not worthwhile.