Flow of Funds Report Show U.S. Imbalances Worse Than Ever
A few days ago, the Federal Reserve released the latest flow of funds report. It shows in short that the imbalances of the U.S. economy are getting worse than before and that the imbalances were worse before than was previously thought.Household debt for the first quarter were upwardly revised from the $11840.1 billion assumed in the previous release to $12099.3 billion. Moreover the report show that debt rose a further 2.27% to $12373.5 billion. That means that household debt reached a record 129.4% of disposable income, up from 128.3% the previous quarter (125.5% with the previous estimate of debt).
You can see in my previous mises.org articles, how the imbalances have steadily gotten progressively worse. When I wrote my first article on U.S. economic imbalances, in November 2004, the debt to income ratio was 114%. In my article on Greenspan, in December 2005 it had risen to 121%. And now it is 129.4% (when Greenspan became Fed chairman it was 77%).
Corporate debt for the first quarter were on the other hand somewhat downwardly revised, to $8468.1 billion from $8557.6 billion. But during the second quarter it rose 1.91% to $8629.7 billion.
Total private sector debt was upwardly revised by $159.7 billion in the first quarter, to $20567.4 billion. It then rose to $21003.2 billion in the second quarter.
"But", bullish commentators often say, you're overlooking how household assets are rising too. But first of all, as I've said before, as assets ultimately derive their value from national income, they can't keep rising faster than national income forever and so periods when they increase faster than national income, might just be followed by periods when they fall relative to national income. Debt however, will not fall in value.
And secondly, if we look at the latest numbers, we might just be seeing the start of declining asset values. Household assets for the first quarter was downwardly revised to $65712.5 billion, from the previous estimate of $66029 billion. Meanwhile growth in asset values slowed significantly and increased only 0.5% to 66044.5 billion, almost the same as the previous estimate of first quarter assets. Net worth is therefore actually lower in the second quarter than the previous estimate for the first quarter.
This means that leverage (household debt/household assets) is now at a record high of 19.3%, up from 13.9% as late as in 1999.
What's more, the entire small increase in household assets came in housing (financial assets actually fell from their downwardly revised first quarter level). And as should be increasingly clear by now, the housing market is doing very badly, and so we should not expect any more value increases there in the short term.
All of this indicates that the U.S. economy is more vulnerable than ever, and that things therefore could get ugly when the next recession comes, which is probably very soon.