Recent releases of estimates of households’ balance sheet and financial burdens (as of June ’19) reveal that net worth continues to rise at the same time that households’ leverage continues to decline. This bears repeating: asset values are rising, but risk aversion remains strong, and that’s quite healthy.
As Chart #1 shows, the net worth (total assets less total liabilities) of the US private sector (households plus non-profit organizations) in June 2019 reached the staggering sum of just over $113 trillion. That’s almost double what it was at the depths of the 2008-9 Great Recession and almost 60% above what it was at its 2007 peak, according to the Federal Reserve. This was achieved as a result of strong gains in every category of assets: savings accounts, stock and bond holdings, real estate, and privately held businesses. What is perhaps most remarkable is that liabilities today have increased by only $1.5 trillion (10%) from their 2008 high.
As Chart #2 shows, for the past several years, the inflation-adjusted level of household net worth has increased by an amount that is very much in line with its historical trend: about 3.6% per year.
Chart #3 adjusts the data in Chart #2 for population growth. Here, too, we see that recent gains in real per capita net worth are very much in line with historical trends (about 2.4% per year). If there’s anything unusual about this, it is that these gains have come despite the fact that the current business cycle expansion has been the weakest ever. Fortunately, it seems that unusually strong corporate profits have offset relatively weak growth, thanks largely to globalization, as I discussed here.
Chart #4 shows the ratio of recurring financial obligation payments to disposable income. Thanks to modest increases in liabilities and lower interest rates on debt, the true burden of household debt has declined significantly. Household financial burdens today are lower than at any time since the early 1980s.
As Chart #5 shows, household leverage (total liabilities as a % of total assets) has declined almost 35% since its high in early 2009, and has returned to levels not seen since the mid-1980s.
In my last post, I mentioned that recessions typically follow periods of excesses. The only “excess” that’s obvious today is federal debt, which has risen to 78% of GDP, as shown in Chart #6.
But that’s deceptive.
As an astute reader (“Cliff Claven”) recently pointed out, the true burden of debt must take into account the amount of interest being paid on outstanding debt relative to GDP. Debt outstanding is quite high relative to GDP these days, but interest payments on that same debt are relatively low, thanks to historically low levels of interest rates. Federal debt interest payments this year will total about 2% of GDP, well below the all-time highs of 3% reached in 1991, according to the Office of Management and Budget (see Chart 4.05 on the aforementioned link). This may worsen, of course, if interest rates rise. But rising interest rates would probably be accompanied by faster growth and/or higher inflation, which in turn would increase nominal GDP, and that would mitigate the burden of rising interest rates. Moreover, faster nominal GDP growth would likely boost tax revenues.
In short, while federal debt looks bad on the surface, in reality we are far from facing a disastrous situation.