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
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.
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
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
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
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.
Categories: It's the Economy