Chart of the Week: GDP w/o Mortgage Equity Withdrawal

Tuesday, December 13, 2005 | 12:24 PM

Calculated Risk notes that Mortgage Equity Withdrawal (MEW), was $171 Billion in Q3 2005, out of total household mortgage increases of $289.5 Billion dollars.

Goldman Sach's estimates ~2/3 of MEW is flowing through to personal consumption. Using their numbers, we can estimate the impact of Mortgage Equity Withdrawal on GDP:
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GDP w/ and w/o MEW (10 Years)
Gdp_w_and_wo_mew_2

Source: Calculated Risk

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Its readily apparent from the graph how crucial MEW has been to GDP spending. If MEW falls significantly, it will be a major drag on GDP: Expect personal consumption to slow, impacting retail. The Real Estate Complex will also see job creation fade.

See also Northern Trust's Paul L. Kasriel Households - Another Quarter Older And Deeper In Debt.

 

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Quote of the Day:

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Tuesday, December 13, 2005 | 12:24 PM | Permalink | Comments (23) | TrackBack (1)
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The bet continues to be that the Fed is almost done. At 4.25 percent after today's move, how high can the Fed Funds rate go? It is easier to assume that the Fed is closer to the end than to the  beginning of the tightening. The FOMC statement was a lot sh [Read More]

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Comments

I'm leery of that statistic but it's a great discussion point. If it is even half true, it confirms the general malaise many Americans feel.

I truly believe the underlying culprit for all of this is globalization. Investment at home is no longer a priority for many American businesses. Abroad is where the growth and, hence, investment is. Thus, somewhat of a jobless recovery.

How about this as a worst case scenario. Cycles repeat. Especially longer wave cycles. In the early twentieth century, the barons of industry controlled a disproportionate amount of wealth in America. The average American lived in a fair amount of abject poverty. In addition to the industrial revolution was a labor revolution. Workers rights and labor movements gained significant strength as common people struggled to improve their lives. That movement led to the American middle class and a boom that has lasted ever since with a few rough patches. It created a consumer based economy that has been the envy of the world.

Today, we see the business barons are again accumulating wealth at a rapid pace in America. Corporate balance sheets are awash in cash yet the middle class seems to be in limbo at best. Investment in the US is languishing in many industries. American companies and American consumers really could care less where they source anything as long as they save a buck. Be that GM bringing SUV engines in from China or the average consumer who doesn't give a hoot where that LCD TV came from as long as he gets $50 off the $1000 price. No one really cares if any of this puts their neighbor out of work. If the misery becomes great enough, there exists a possibility of a backlash. A change in trend. A consumer who becomes empowered again refusing to be supportive of globalization. Hence, a reversion from globalization to nationalistic practices all started with a consumer movement. Seem unreal? Extreme? Impossible? It is surely a viable end result. Not anything that will develop any time soon but it happened before. Another manifestation of the labor movement was the Smoot Hawley Tariff Act.

The more things change, the more they remain the same.

Posted by: B | Dec 13, 2005 12:56:03 PM

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