Federal Reserve Household Balance Sheet Data Since 1988

U.S. Household Balance Sheet Data – Pattern Analysis Data Extracted From Federal Reserve Z.1 Reports http://www.federalreserve.gov/releases/z1/Current/

Fulton Wilcox March 10, 2012

1. “America’s” Balance Sheet •

Following is a “pattern analysis” of swings in the U.S. aggregate household balance sheet between 1988 and 3rd quarter 2011, as published by the Federal Reserve – –

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Change in household net worth (“wealth”) has been almost entirely governed by the ups and downs of asset values – – –

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Both long term and cyclical “bubbles” are heavily influenced by investor trade-offs among three broad asset categories: real estate , business equity and “cash.”

Despite the impression that “bubbles” are driven by debt, instead shifts in asset allocations fuel balance sheet asset and net worth volatility The principal fuel overheating “bubbles” is absolute and relative demand for assets , not debt

Change in asset values reflect both changes in the quantity of assets and “mark to market” impact of current period sales on prices of all similar assets – –

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The Federal Reserve publishes a balance sheet for U.S. households (combined with “non-profits”) and it also publishes balance sheets on several categories of non-financial businesses.

In this portrayal, I have pasted together data from several decades of Federal Reserve household balance sheet reports to optimize visual impression of the data rather rather than exactness .

For example, current-period selling prices of ten houses in a community can significantly impact the mark to market value of 1,000 or more comparable houses in that locale Unrealized “paper” mark to market asset value increases or declines are very real in revising asset allocations and altering various current-period transactions, such as insurance premiums and taxes

From an intelligence analyst perspective, too often the nation’s “balance sheet” is ignored, the GDP is assumed to be “the economy”

2. Household and nonprofit entity assets and liabilities since 1988 (in reporting period $ trillion)

$80 $70 $60 $50

Assets

$40 $20 $10 $0

Household and non-profit net worth = assets minus liabilities

Liabilities 1988 1990 1992 1994 1996 1998 1999 q2 1999 q4 2000 q2 2000 q4 2001 2q 2001 4q 2002 q2 2002 q4 2003 q2 2003 q4 2004 q2 2004 q4 2005 q2 2005 q4 2006 q2 2006 q4 2007 q2 2007 q4 2008 q2 2008 q4 2009 q2 2009 q4 2010q2 2010q4 2011q2 2011 Q4

$30

“great recession� crushes Asset values and household net worth

U.S. household net worth is dominated by asset values rather than debt (liabilities) because assets are far larger and more volatile.

3. Household and nonprofit entity asset growth since 1988 (in current period $ trillions) $100 Real estate bubble “too hot” asset growth begins

$90 $80

“Great Recession” cuts values $12 trillion

.COM bubble “too hot” asset growth

$70 $60 $50 $40

2011 Q4

2011q2

2010q4

2010q2

2009 q4

2009 q2

2008 q4

2008 q2

2007 q4

2007 q2

2006 q4

2006 q2

2005 q4

2005 q2

2004 q4

2004 q2

2003 q4

2003 q2

2002 q4

2002 q2

2001 4q

2001 2q

2000 q4

2000 q2

1999 q4

1999 q2

1998

1996

1994

1992

1990

$20

1988

$30

If in 1988 someone setting Goldilocks “not too hot, not too cold” alarm levels might have used 5% as the low and 6% as the high, combining sustainable real growth of 2.5% to 3% with “normal” inflation of 2.5% to 3%. Today’s post recession asset values teeter at “too cold” levels after a 2nd dip.

4. Value of household and nonprofit real estate, equity and “cash” assets In reporting period $ trillions $25

.com bubble overpricing of equities

$20

Real estate

equities

$15

$10

“Cash” = deposits, money market

2011q2

2010q4

2010q2

2009 q4

2009 q2

2008 q4

2008 q2

2007 q4

2007 q2

2006 q4

2006 q2

2005 q4

2005 q2

2004 q4

2004 q2

2003 q4

2003 q2

2002 q4

2002 q2

2001 4q

2001 2q

2000 q4

2000 q2

1999 q4

1999 q2

1998

1996

1994

1992

1990

1988

$0

2011 Q4

$5

Most asset volatility “action” occurs in real estate and equity assets, subject to mark to market value shifts. “Cash” represents bank deposits and similar mostly fixed value liquid assets.

5. Share (%) of total assets shift as market preferences for equities and real estate rebalances 40% Peak of .com equities bubble

Peak of real estate bubble

35% 30% 25%

2011‌

2011q2

2010q4

2010q2

2009 q4

2009 q2

2007 q4

2007 q2

2006 q4

2006 q2

2005 q4

2005 q2

2004 q4

2004 q2

2003 q4

2003 q2

2002 q4

2002 q2

2001 4q

2001 2q

2000 q4

2000 q2

1999 q4

1999 q2

1998

1996

1994

1992

1988

1990

Crossover from real estate into equities

15%

10%

Crossover to equities, very tentative

2008 q4

Crossover from equities into real estate

2008 q2

20%

Starting in 2001, real estate in three years to picked up 3% of share from equities (equal today to a shift of about $2.1 trillion into real estate)

6. Total household and nonprofit liabilities and within that total, mortgages and consumer credit in $ trillion $16.0 $14.0

Total liabilities

$12.0

Home mortgages

$10.0 $8.0

$6.0 $4.0

Consumer credit

$2.0

$0.0 2006

2007

2008

2009 2010q1 2010q2 2010q3 2010q4 2011q1 2011q2 2011q3 2011q4

Contrary to widespread impression, household “debt� has shown miniscule change since 2006.

Static levels of debt became more burdensome because of volatility in asset values

7. Pattern of shifts in “cash” as percent of total assets, primarily as cash shifts into and out of into real estate and equities assets 22% 20% 18% 16% 14%

12%

1988 1990 1992 1994 1996 1998 1999 q2 1999 q4 2000 q2 2000 q4 2001 2q 2001 4q 2002 q2 2002 q4 2003 q2 2003 q4 2004 q2 2004 q4 2005 q2 2005 q4 2006 q2 2006 q4 2007 q2 2007 q4 2008 q2 2008 q4 2009 q2 2009 q4 2010q2 2010q4 2011q2 2011 Q4

10%

Shifts out of or into “cash” reflects confidence/lack of confidence in other asset categories. Shifting cash from real estate and equities has both direct and indirect “mark to market” impact on asset values

8. Potentially available “cash” buying power for real estate or equity assets 100% 90%

Other assets – pension and insurance reserves, etc.

80% 70%

“Cash”

60% 50%

Real estate plus equity asset holdings

40%

Today’s 5% difference between “normal” and actual cash share has removed about $3.5 trillion that otherwise would be invested in real estate or equities

2011…

2011q2

2010q4

2010q2

2009 q4

2009 q2

2008 q4

2008 q2

2007 q4

2007 q2

2006 q4

2006 q2

2005 q4

2005 q2

2004 q4

2004 q2

2003 q4

2003 q2

2002 q4

2002 q2

2001 4q

2001 2q

2000 q4

2000 q2

1999 q4

1999 q2

1998

1996

1994

1992

1990

20%

1988

30%

9. Summary •

Little attention is paid to U.S. household national “balance sheet” data even though we have experienced two serious asset bubbles – – –

–

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The household redeployment of asset value has a pattern of its own – – –

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Undue attention is paid to mere piece parts such as the U.S. government “national debt” or stock market values or gold without looking holistically at assets and debt Debt is certainly a problem for millions of households, but most of today’s “debt” problems are reflective of excessive swings in asset values, not of debt Monitoring and indeed debating the patterns of the national “balance sheets” is critical because we need “Goldilocks” asset growth – not too hot and not too cold However, the Congressional Budget Office and other major suppliers of economic analysis give little or no attention to national balance sheet data

Households move trillions among the “big three” asset categories of real estate, equities and cash, based on asset owners’ changing moods and expectations If real estate attracts “share”, millions of properties now valued at low prices may recover value because of mark to market impact, perhaps almost as precipitously as those values declined The degree to which households concentrate their redeployment of assets may determine the next “bubble,” as illustrated by swings in the value of gold and other narrowly focused assets

The apparently little used Federal Reserve balance sheets probably need enhancement and refinement – –

Slow to be published Asset values are critical, while debt is comparatively static