Consumers' Financial Health Much Better

Consumers’ financial health has substantially improved in 2015, and their net worth has now surpassed that of pre-recession 2006, according to the Fed’s 2015 Q4 Flow of Funds report.  That is the main reason economic growth prospects have picked up in 2016.

The net worth of households and nonprofits as a percentage of Gross Domestic Product rose to $86.8 trillion during the fourth quarter of 2015, said the Fed. The value of directly and indirectly held corporate equities increased $758 billion and the value of real estate rose $458 billion.  Consumers’ net worth is now the highest in history in this graph that dates back to 1952.  This includes real estate and financial assets (stocks, bonds, pension reserves, deposits, etc) net of liabilities (mostly mortgages).
 

  

Graph: Calculated Risk

            We are in a goldlilocks economic moment, in other words.  Gas and energy prices in general are extremely low, there is almost no inflation, and we are nearing full employment.  Interest rates are also still at record lows, with fixed 30-year conforming mortgage rates still at 3.375 percent for a 1 point origination fee, which means housing will continue to contribute to growth.

 

      We know consumers are buying more because consumer debt is increasing.  January's increase in total outstanding consumer credit is an initial $10.5 billion (subject to later revisions, as more data comes in). But revolving credit, the component that tracks credit cards, fell $1.1 billion in January following December's nearly unrevised $5.5 billion increase (due to holiday spending). Even with January's dip, revolving credit has been showing strength and has been positive for consumer spending, hinting at greater willingness of the consumer to take on credit-card debt.

            And sure enough, ex-gas retail sales month-to-month expanded for seven months in a row which matches the longest streak in five years, as I’ve said. Year-on-year, ex-gas sales are at a very respectable plus 4.5 percent and reflect special strength in vehicle sales, up 6.9 percent on the year.

 

Graph: Econoday

            This is while overall construction spending rose a strong 1.5 percent in January in strength. A one-month surge in highway & street spending skewed the headline higher as did gains for manufacturing and on Federal construction projects.  Year-on-year rates include an impressive 33.9 percent gain for highways & streets which is a big category. Federal, a far smaller category, is up 9.9 percent.

Turning to the private nonresidential components, offices lead at a 24.8 percent year-on-year gain.  Demand on the multi-family side, reflecting strength in rental prices, also has been very strong with year-on-year spending up 30.4 percent vs 6.6 percent for single-family homes. Together, residential spending is up a year-on-year 7.7 percent.

We mention construct spending because construction will continue to add higher paying jobs, so important to income growth, in particular.

Harlan Green © 2016

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