The State of the Consumer, by the Numbers
Given our focus today on Retail sales this week, it is appropriate to reference another source of data on the consumer.
This commentary comes to us via Northern Trust's Paul Kasriel. Paul is the Senior Vice President and Director of Economic Research at NT, and I had the pleasure of meeting him (and Caroline Baum) at Bloomberg last month. He is the recipient of the 2006 Lawrence R. Klein Award for Blue Chip Forecasting Accuracy.
His recent commentary focused on the Fed's Flow-of-Funds data. It is rather insightful work into consumer debt and savings. Some of it might be a bit beyond the interest of many readers, so to make it more accessible, I did a little slicing and dicing. Here is my highly edited version, emphasizing The State of Consumer, by the Numbers:
~~~
Kasriel: I love the Fed's quarterly flow-of-funds report. It usually is the mother lode of enlightening economic nuggets of information. And the Fed's latest release on December 7 of third-quarter data was rich with these nuggets.
The slowdown in borrowing was due principally to the household sector: Chart 2 shows that after hitting a post-WWII high of 14.6% in Q3:2005, household borrowing relative to disposable personal income (DPI) dropped to 8.8% in Q3:2006 - the lowest since 7.6% in Q3:2001, when the economy was in a recession.
Notice in Chart 2 that precipitous declines in this percentage tend to be followed by the onset of economic recessions (indicated by the shaded areas in the chart).
Just to demonstrate how precipitous the current fall off in household borrowing has been, I had Haver Analytics calculate the year-over-year change in household borrowing relative to DPI. This is shown in Chart 3. Wow! The percentage is down from year-ago by 5.8 points - the largest decline since Q2:1980, when President Carter urged us to don sweaters and tear up our credit cards.
But in the current situation, households have not been cutting up their credit cards but rather sharply scaling back the growth in their mortgage credit as the housing market recedes. This is shown in Chart 4. The most recent year-over-year decline in household mortgage borrowing as a percent of DPI is unprecedented in the post-WWII period.
In sum, in the past few quarters, we have seen a sharp slowdown in household borrowing.
Despite the fact that household mortgage borrowing has slowed in recent quarters, the leverage in owner-occupied residential real estate reached a record high 46.4% in Q3:2006, as shown in Chart 8. If mortgage borrowing slowed, why the increase in leverage? Because, as shown in Chart 9, there has been a sharp slowdown in the growth of the total market value of residential real estate. With a still -sizeable excess inventory of homes for sale, continued weak growth, perhaps even a contraction, in the market value of residential real estate could reasonably be expected in 2007.
With the sharp slowdown in the growth of housing values, it is quite natural that there also would be a sharp slowdown in the growth of homeowners' equity. This, combined with higher adjustable rate mortgage financing rates, has resulted in a sharp slowing in mortgage equity withdrawal (MEW).
As shown in Chart 10, MEW peaked at an annual rate of about $730 billion, or 8.1% of DPI in Q3:2005, slowing to an annual rate of only $214 billion in Q3:2006. Along with corporate stock retirement, MEW has been an important source of funding for household deficit spending in recent years.
Therefore, this slowdown in MEW would be expected to slow the growth in household spending, which, as shown in Chart 11, has begun. On a year-over-year basis, growth in the sum of real personal consumption and residential investment expenditures has slowed to 2.0% in Q3:2006, the slowest growth since the past recession.
Household liquidity fell to a post-WWII low in Q3:2006 (see Chart 12). I am using as a measure of liquidity household deposits and money market mutual funds as a percent of total household liabilities.
Note these 3 factors:
1) Households already have borrowed so much that their leverage ratio is at a post-WWII high (see Chart 13).
2) Households have already borrowed so much that their debt service burden is at a 25-year record high (see Chart 14).
3) Residential real estate, which accounts for 30.5% of the total market value of household assets (see Chart 15), is the single largest asset in households' portfolios compared with deposits, credit market instruments, corporate equities (about 44% of which are held on their behalf in pension funds and insurance companies) and other tangible assets.
Of these other asset categories, residential real estate probably is the least liquid, aside from used refrigerators (other tangible assets).
In sum, households have never been as highly levered as they are now or as illiquid as they are now, and their single largest asset is in danger of actually falling in value. If the Fed had to resume raising interest rates in this environment, it would be "Katy, bar the door" for household finances!
(Some emphasis added).
I removed some of the more complex analysis of yield curve inversion, overseas purchase of US Debt, and some more challenging items. Those interested in reading the entire commentary can go to Northern Trust's research site (below).
>
Source:
Festivus Flow-of-Funds Stocking Stuffers
Paul Kasriel
December 15, 2006
http://tinyurl.com/yg2vms
Wednesday, December 27, 2006 | 11:45 AM | Permalink
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Comments
Please note: when i click on the "continue reading" hypertext, no additional information is loaded ... perhaps this is just a firefox issue?
Posted by: kim | Dec 21, 2006 11:58:30 AM
nope, i'm on IE and get the same thing - maybe that's all there is?
Posted by: todd | Dec 21, 2006 12:10:56 PM
The "continue reading" link should only be on the home page template, not the detail page template. I think it surfaced on the recent redesign.
Posted by: MAS (San Diego) | Dec 21, 2006 12:13:26 PM
Same here. Dunno if BR had more comments, but the full article can be found at: http://tinyurl.com/yczwzj
Posted by: Estragon | Dec 21, 2006 12:17:01 PM
Paul Kasriel is indeed a National Treasure. I just wish I could read more....
Posted by: Jim M | Dec 21, 2006 12:25:42 PM
Its fixed --
Posted by: Barry Ritholtz | Dec 21, 2006 1:50:43 PM
Problem solved. :)
Posted by: Joelle | Dec 21, 2006 1:52:47 PM
Great charts, BR. Thank you!
I remember seeing a few of these charts last year when they were at their peaks.
Now they have fallen, some substantially, and still neither many analysts nor the equity markets have changed their status quo.
Makes you wonder.
Posted by: Michael C. | Dec 27, 2006 1:47:56 PM
I just saw the NAR's chief economist and marketeting rep David Lereah on CNBC. I figured he would be taking a victory lap after this mornings new home sales number. Interestingly, he was cautious. I am sure he already knows tomorrows existing home sales number. Does that mean the number will be bad? It also makes me wonder if he should be making public appearances in front of an important economic number.
Posted by: GerryL | Dec 27, 2006 1:58:00 PM
More data and very well done. But it simply doesn’t matter to ‘magic bid.’
The more penetrating question is when does all this begin to matter? That will be bank.
Posted by: dave | Dec 27, 2006 3:11:09 PM
Why take victory over poor New Home Sales? Yup, that is right, they were poor. About 1.000. Don't be swayed by silly CB "annualizations". Those idiots take 6 months before they can get actual result. See 99-2000 for how "accurate" they were intially. By h1 2008, they will be about 750 as the recession is nearing its ending(hopefully lol).
FWIW, December the housing market is tannnnnnnnnkkkkkkkkkkkkkiiiiiiiiinnnnnnnnnggggggggg again. Mercy, worst since the "summer death spiral". Things are falling apart wildly. Looks like the "real" beginning of the actually bust after 2006's "normalization".
Posted by: Cherry | Dec 27, 2006 3:34:28 PM
Cherry
"the sky is falling " !!!
how often will you troll over here and continuously make that ridiculous claim... .. every month you say it, and when it doesn't happen you come back the next month ... you have no credibility
it's pathetic already
Posted by: Nuts | Dec 27, 2006 5:52:00 PM
Together with all those claiming that "The inverted-yield curve doesn't matter anymore" even though it often predicts recessions by about 12-months. Cherry still has time :)
Posted by: My1ambition | Dec 27, 2006 9:03:50 PM
The sky is falling little man, you deal and except nuts. What is is, punk.
It doesn't happen? You moron, of course it happens, the numbers have been trending down for months now in Real Estate. The whole sector has "normalized" off the mad 2002-05 market and is now moving to legit bust.
Get a freaking clue dweeb, nuts, NEVER call me out again, or I will make you a veggie, got that weak man?
Posted by: Cherry | Dec 27, 2006 11:24:11 PM
just one data point, but from an area with a very hot housing market last year.
I was at Dillard’s today picking up a new sweatshirt. I asked the cashier, Tariq, how business was doing since Christmas. He said, with a sour look on his face, everyone is returning, nobody buying.
Posted by: dave | Dec 28, 2006 12:38:42 AM
Cherry, ok we're with you on the meltdown, but there's really too many questions that need answering and many will be only with time.
How will the government, Fed, investors react once the panic sets in?
How long will it last?
How extreme? 1907, 1929, 2000?
What will be the investing opportunities?
How much will housing effect the economy?
Will the US recession effect China? India?
What other geopolitical events will trigger a rebound/shock to the already existing financial troubles?
As Mark Twain says "...it rhymes". So it won't be the 30s or 70s all over again. It will be different. It will be 2007.
My point is that in order to play this one right you need to simply keep listening to what the markets are telling us. They decide. All of our hopes, emotions and predictions as many millions we may have banked in them must be ready for an about face at any moment.
Posted by: My1ambition | Dec 28, 2006 4:41:19 AM
Cherry
are you ok there ?
what drugs are you on ?
you're the biggest TROLL on this site
it's pathetic to see you mangle the English language and make your weak arguments ... it's embarrasing to see you rant and rave here .... I actually feel bad for you
Posted by: Cherry -- wacko | Dec 28, 2006 9:12:06 AM
New Home Sales ---- higher than expected for the 3rd straight month , but still near a 6-year low
Existing Home Sales ---- higher than expected for the 2nd straight month
Inventory down slightly
Case-Shiller housing futures -1.9% now , was -5.2% three months ago ....
maybe these numbers are aberrations and will be revised , but they're certainly food for thought----
MBA applications were down big this week and are at a 5-month low ,
prices year over year are still down and suffered their worst decline in September ,
foreclosures up 42% in October
we have a ways to go before this ends
Posted by: jj | Dec 28, 2006 10:28:39 AM
Why didn't the drop in 1965 trigger a recession? Or did it and it's not marked? Just curious.
Posted by: rajesh | Dec 30, 2006 7:37:38 PM
