Household Wealth and Consumption
As if you haven’t had to digest enough troublesome tales from the housing market, along comes the Federal Reserve System’s Board of Governors with news that owners’ equity as a percentage of the total value of residential real estate hit an all-time low of 53.1 percent in the fourth quarter of last year.
Simply looking at the picture demonstrates the problem with making too much out of that statistic: Most quarters bring a new low in owners’ equity share. The same issue arises if we view the flip side of household balance sheets and look at household debt as a percentage of disposable income:
Although there is surely a limit on the level of debt that can be sustained relative to income, we have apparently not yet found that limit. What’s more, total household net worth as a percent of disposable income continues to expand from its post-1991 recession low and is at historically high levels. Not everyone, however, will be impressed by that net worth statistic. As the experience of the late 1990s demonstrated, the net worth picture can change rapidly when the bottom falls out of an asset boom. And there is little doubt that the importance of housing investments in household balance sheets has increased over the past several years, on both the asset and liability side:
In the face of sharply declining rates of housing-price appreciation, these balance sheet developments are generating no shortage of concern about the financial health of U.S. households. One aspect of these concerns is that a deterioration in household wealth could cause a noticeable decline in consumption spending, requiring yet further, potentially disruptive, adjustments in the allocation of economic resources. It is true that growth in retail sales has been drifting south for over a year now…
…but we should remember that overall consumption expenditure only loosely tracks retail sales:
In fact, though the mix of expenditures on durable goods, nondurable goods, and services shifted in January, total consumption expenditures appear to be holding steady:
Though the most recent Blue Chip forecasts for 2007 show only a slight drop-off in the growth of consumption spending, it is possible that the pace of consumer spending will may look less appealing when the data for the first quarter arrives. Furthermore, those healthy spending levels of the past several years have been associated with a dramatic decline in household saving.
Relatively high levels of saving by businesses have been enough to keep net national saving in positive territory, and low personal saving rates do not automatically spell trouble. But it is fair to wonder just how long household saving can remain negative before consumption plans begin to feel the strain.