It's the Economy

What is the story behind the declining household worth story?

There was a story that Household Net Worth Fell during 4th Quarter last Year. What will the headline be after the 1st Quarter data is released?

I was asked to look into a report that said that US Household Net Worth fell $3.73 trillion during the fourth quarter of 2018. This article was published March 7th, or nearly the end of the first quarter. Net worth fell from $108 trillion to $104 trillion.  There has been a considerable amount of activity since December 24th. Was this a blip, a heart attack, or something else entirely?

The Dow Jones Industrial Average dropped 17.63% from the End of September through December 24th. The DJIA stood at 26,458 on September 28th and 21,792 on December 24th.  This article claimed that by the time that “the market drop ended in late December, households saw $4.6 trillion worth of equity value deteriorate. The decline was offset somewhat by a $300 billion increase in real estate value.” Here’s the thing, by the time that this article was written, assuming March 6th research, the  DJIA was 25,673.  This means that the market was only off 2.97% from the September peak and up 17.81% from the December 24th low. If the net worth calculation was partially based on the stock markets then when the first quarter number is released we should see a significant rebound from the Christmas lows.

Net Worth increased from the end of 2017 by 845 billion dollars.  The authors of the article were comparing quarter to quarter data instead of same quarter data. The same quarter growth was under 1.00% at 0.816%. What was not mentioned was that Household net worth grew from $100.925 trillion to $108.058 trillion between the third quarter of 2017 and the third quarter of 2018, or 7.07%.

The article ended with a pessimistic forecast of 0.5% GDP growth for the first quarter of 2019.  The thing is that this talk of a decline in GDP to under 1.0% is created in an economic echo chamber.  The “GDP Now” forecast is for 0.4%. According to the GDP NOW article some economists are expecting 0.7% growth to 2.3% growth. The thought is that the December Retail Sales data “disappointed” during fourth quarter and that the February Jobs Report “disappointed” when it was released the first Friday of March.  The December Retail Report included data that showed that we had over $6T in retail sales during 2018 and that December was the best December ever. This means that a large portion of the economy was growing at 5% last year. If retail sales are growing at 5% then other parts of the economy, primarily workers and wages, must be growing over 5% or people “must be” going into debt.

What do the GDP trends tell us? We have not had annualized GDP under 1.5% during the first quarter of any year since the first quarter of 2014. This may be because, as others have reported, the way that first quarter GDP is calculated was changed during 2013.. The headline GDP number is the annualized GDP, the “what if we grow for three more quarters at the same rate that we grew this quarter”  GDP.  Remember that there were gross revisions to the GDP data during July of 2018 with the released of the advance second quarter GDP report.

Annualized, quarter to quarter GDP could rise from first quarter's 2.2% of last year and drop a little from the 2.6% reported during the fourth quarter GDP of 2.6%.
Same quarter growth, a second measure of GDP, is growing at 3.1% and could hit 3.2% or 3.3%, making it 11 consecutive quarters of improving same quarter growth.

We are seeing improving annualized GDP for the first quarter data. we saw annualized GDP 2016Q1 of 1.5%, 1.8% during 2017Q1 and 2.2% during 2018Q1. The first quarter for 2016 data was a bounce off of a low 2015Q4 value. The other fourth quarter data were slight drops from the prior third quarter data. This means that we could see a modest decline from last quarter’s annualized GDP of 2.6% and still be better than than the 2.2% last year first quarter.

We are in a the tenth quarter of GDP acceleration. The same quarter GDP was slowing from the first quarter of 2015 through the second quarter of 2016. That trend ended with the third quarter of 2016. We have seen equal of improving same quarter GDP from quarter to quarter since that time. The data indicates that we should see the same quarter GDP either hit 3.1% or expand to 3.2% or 3.3%. If we see this level of same quarter growth then this should positively impact the quarter to quarter growth rate.

Watch the “bounce.”  There often is a bounce off of a low prior quarter in the annualized GDP data. The 2011 and 2014 data are prime examples of a bounce off of a low value.  We saw a bounce during the second quarter of 2014 from -1.0% to 2.9% and a fourth quarter bounce from -0.1% to 4.7%.  A similar bounce was seen when the second quarter 20154 came in at 5.1% after a -1.0% first quarter annualized growth rate.  Some economists and commentators have ignored  this bounce. Are we bouncing off the prior quarter data this year or the first quarter GDP last year? We could bounce higher off the 2.2% Q1 level last year and drop from the 2.6% last quarter. Both are simultaneously possible.

Is this being overly optimistic? There was an article published in the New York Times titled “The Experts Keep Getting the Economy Wrong.” I agree with the title of his article and disagree with his conclusion. I think that the experts are getting the economy wrong because they focus on the seasonally adjusted data and report on the economic reports. The true nature of this economy is in the non-seasonally adjusted data. The true value is found in the data not the reports on the data.  Leonhardt blames what he perceives as “an extended funk” on a savings glut and on “de-massification” or and investment slump. It is a good thing that people are saving money for a rainy day. It is possible that part of the Great Recession was that we were “overbuilt.”

The untold story of the past two GDP reports has been the surge in Gross Private Domestic Investment (GPDI.) First we have to understand that there were quarter to quarter declines in GPDI during the third quarter of 2015 through the third quarter of 2016. Five quarters of declining investments is not good. These first consecutive quarters of declining GPDI contribute to three consecutive quarters of same quarter declines in GPDI. This same quarter decline happened during three first  three quarters of 2016.  We are now seeing a surge in quarter to quarter and same quarter GPDI growth. GDPI tends to spike during the third quarter and slow in drop a little during the fourth quarter, in non-seasonally adjusted dollars. This 4th quarter was more than 2017Q4 so the investments are growing.

The savings rate has been rising. There was a time while Alan Greenspan was the Federal Reserve Chairman there was concern over a growing negative savings rate. Disposable Personal Income his 15.8 trillion during the fourth quarter, as reported in the GDP report (Table 8.) The same table indicates that Personal savings was 6.7% during the fourth quarter, the same as the annual rate during 2016, 2017, and all of 2018. The savings rate was over 10% for most of the 1960s, 1970s, and early 1980s. It dropped below 5% prior to the Great Recession.

Disposable Personal Income has been rising. The personal disposable income in the United States grew from $13.949 trillion dollars during 2017 to $14.350 trillion during 2018. This is an increase of  2.87%. The growth during 2017 was 2.6%. It was 1.94% during 2016 and 1.78% during 2015. We saw declines in personal disposable income during 2009, during the recession, and during 2013.

If you get fat and lethargic then you have to change your lifestyle.  We had a building boom during the 2000s that went bust after 2006.  We apparently had too many bookstores and coffee shops and gas stations. Demassification is a fancy way of saying that we were overbuilt.

Leonhardt wants solutions, called the tax cuts dreadful. Leonhardt repeated the Democrat talking points that the tax cuts only helped the wealthy. The wealthy were going to be helped because they pay the most taxes. The tax cuts impacted everyone. Originally there were stories that tax refunds were lower this year than last year. The obvious reason, for some, is that if you have your tax rate reduced then you get to keep more of your money. If you get to keep more of your money there is less for the government issue as refunds. More recently there have been articles that say that refunds are at or above 2018 levels. If people make more money through pay raises and bonuses it is possible for a lower tax rate to generate the same amount of tax revenue. Lower taxes can increase disposable income. Is rising disposable income dreadful?

Leonhardt thinks that we need more social safety nets. He wants to see something done with regard to Social Security. Remember that Uncle Sam sees the “off-budget surpluses” in Social Security as a way to offset “on-budget deficits.” If we provide more social safety nets then we will need higher tax rates. Sooner or later, “we will run out of other people’s money,” as the late Margaret Thatcher would have said.

The experts have been “getting it wrong” because they are commenting on the reports and not the data. If you watch the news prior to the jobs report the “projections” are roughly the same every month: 180,0000 seasonally adjusted non-farm payroll positions and unemployment around 3.9%. They just change January to February in the headline and keep the number the same. This is not reality. There are variations in the CPS jobs and unemployment data, and the CES worker data, and they are making comments on both of them at the same time.

The Boom is here – and like a sonic boom it is sometimes delayed. Leonhardt  followed this article with another article the following day  titled “There is No Boom: Want proof? Look at the economic forecasts of the past decade — and all the disappointments that have followed.” The author criticized the experts for looking for “Green Shoots” in the economy. He was back to the idea that there wasn’t enough real investment happening and that we should be concerned if unemployment started rising. The problem here is that the unemployment rate is so low right now, and the unemployment level is so low,  that eventually it will have to rise. Sooner of later you run out of unemployed workers, those receiving continuing unemployment claims,  and people are encouraged to re-enter the workforce, temporarily increasing the U-3 Unemployment rate.

How does all of this wrap back around to Household wealth? If home prices are rising, and they are, and if disposable income is rising, and it is, then people can afford to buy new homes, or existing homes, that may be more expensive than their current homes opening up inventory for other buyers to buy. More disposable income can go to two places, savings or spending. Savings can include retirement savings or the stock market. If people do not want to move then they can invest in updating their current homes. If people have more money invested in their homes, their retirement investments, or in savings their household wealth situation improves.

It will be another three months until we receive the data on household net worth. Remember that the report was comparing 4th quarter growth versus annual growth in net worth from the third quarter and not fourth quarter to fourth quarter growth.  Third quarter only growth was over 7%. We saw growth of 1% from fourth quarter of 2017 to first quarter of 2018. We saw First Quarter grow by 7.75% from the first quarter of 2017. We could see net worth jump from $104 trillion to $112 trillion.  GDP, net worth and savings could all increase first quarter. What will the headline be? “Economy continues to expand even with Trump at the helm” or “Obamanomics continues to wave its magic wand two years after Obama leaves White House?”

It’s the economy.

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