Economy
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Title: Households’ Balance Sheets and the Recovery
Source:
Fed Cleveland
URL Source: http://www.clevelandfed.org
Published: Sep 10, 2010
Author: Pedro Amaral
Post Date: 2010-09-10 13:51:47 by war
Keywords: None
Views: 6390
Comments: 8
Since the Second World War, real GDP in the United States has grown, on average, at a yearly rate of 3.2 percent. This is what economists call “trend growth.” Whenever the U.S. economy is faced with a recession and grows below trend for a while, a recovery period typically follows in which growth is above trend. In a previous Trends article I pointed out that the current recovery and the previous one are weak in the context of past recessions. As the figure below illustrates, in these two instances, unlike in previous recoveries, GDP grew either at or below trend for the year following the trough. The latest numbers from the National Income and Product Accounts suggest that the state of the recovery is not as bad as one might think at first glance. Looking at the behavior of the different GDP components reveals some short-term effects that are likely to go away in the third quarter. While overall GDP grew at a rate of only 1.6 percent, gross domestic purchases, a series which subtracts exports from GDP and adds imports, grew at the healthy pace of 4.9 percent. This means net exports “robbed” GDP of 3.3 percentage growth points. In fact, imports alone grew at a yearly equivalent rate of 32.4 percent, a clearly unsustainable rate that no doubt owes much to the broad appreciation in the U.S. dollar vis-à-vis the currencies of major U.S. trading partners. Even if things do improve slightly in the near future, we would still be growing along with the trend and not above it as in most recoveries. The reasons for the sluggish pace of the two latest recoveries are to be found in the differences between these two recessions and previous ones. While many factors may qualify, I will focus on the effect of the downturns households’ balance sheets. The chart below shows the behavior of households’ (and nonprofit organizations’) net worth in the last six recessions. It is apparent that in the last two the damage to households’ balance sheets was both deeper with and more protracted than in the previous episodes. What was behind the drop in the latest recession? During this period, liabilities were roughly constant, so the drop happened because of declines in asset values caused by the real-estate collapse and the subsequent depreciation in financial assets. In the 2000 recession the drop was due to the stock market collapse. In contrast, in the twin recessions of the early 1980s, net worth never decreased, and in the early 1990s it dropped only about 2 percent. The drops in household net worth help explain the protracted recoveries after the last two recessions. Personal consumption expenditures are the single biggest component of GDP at around 70 percent. If there is to be a solid recovery, consumption needs to increase at a substantially higher rate than the 1.7 percent it has averaged over the last year. But households are not going to start consuming at substantially higher rates until they have fixed their balance sheet problems. This is why the savings rate has been so high lately: Households are working hard at improving their wealth to income ratios at the expense of consumption. In previous recessions, since net worth did not fall by a substantial amount, this was not a problem. As incomes started growing again, consumption followed suit. Right now, an important part of that income growth is being channeled to savings. As the chart above illustrates, net worth is still well below prerecession levels and, barring an increase in asset prices (real-estate prices or stock market prices), the only way to increase it is by saving more and consuming less, further delaying the recovery. Finally, note that this figure hides a lot of heterogeneity in terms of asset holdings across households. At the peak that preceded the most recent recession, real estate represented roughly a third of total household assets, while most of the remainder was in the form of other financial assets (stocks, bonds and related derivatives). Households at the very top of the income scale hold a disproportionate amount of wealth in the form of these financial assets, which in turn means that the vast majority of households have most of their wealth in the form of housing. Since real-estate-related assets declined by 30 percent from peak to trough (compared to a 22 percent decline in other financial assets), the decline shown in the graph, as large as it seems, actually underestimates the losses most house
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#1. To: war (#0)
Uh-huh. What were they assuming as the inflation rate? Are they saying it's been the same since the 70's, as well? Such blanket statements as the first sentence in this article, tell me that the rest of the article will be equally empty. Feh.
The current members of the "You're too stupid to find your own asses with both hands AND a set of written instructions" list includes war, calcon, e_type_jack-off, mad-dog (more like rabidly stupid), ibluafartsky and the fascism-shill no gnu taxes (aka 400 bucks, happyfunball, 50yardline, etc, etc.) If you're on the list, don't bother writing, 'cause you're a waste of flesh.
3.2 is real GDP [GNP] which is nominal-deflator.
Tull Comes Home: "HI honey...I'm home..."Where have you been?" "Boinking my fellow moderator...now shut up and make me dinner..."
LOL. That's your story, eh? The current members of the "You're too stupid to find your own asses with both hands AND a set of written instructions" list includes war, calcon, e_type_jack-off, mad-dog (more like rabidly stupid), ibluafartsky and the fascism-shill no gnu taxes (aka 400 bucks, happyfunball, 50yardline, etc, etc.) If you're on the list, don't bother writing, 'cause you're a waste of flesh.
Do you know what "real" as opposed to "nominal" GDP is? Your moonbat site does. Not that you;d know.
Tull Comes Home: "HI honey...I'm home..."Where have you been?" "Boinking my fellow moderator...now shut up and make me dinner..."
Do you know the difference between inflation and deflation? Do you understand the difference between +3.2 and -3.2? Do they cite in the article, by what methodologies they came to their conclusion? Do they cite ANY empirical data, which can be verified? Of course not. The article is bullshit. Your attempts to flog the dead horse you posted, have failed. You should be used to it by now, though. Moron.
The current members of the "You're too stupid to find your own asses with both hands AND a set of written instructions" list includes war, calcon, e_type_jack-off, mad-dog (more like rabidly stupid), ibluafartsky and the fascism-shill no gnu taxes (aka 400 bucks, happyfunball, 50yardline, etc, etc.) If you're on the list, don't bother writing, 'cause you're a waste of flesh.
Douchebag...we went 5 rounds on this before and you fled for the bozo when you were bloodied and staggered. You have absolutely 0 in the way of authority to simply come in and declare something bullshit. The "methodology" that is used here is clearly spelled out in the GDP releases and in the Fed's own chain weighting of prices that is used as the deflator. Do you know the difference between inflation and deflation? I've shown you before that I do while you've shown me before that you don't. Inflation - too many dollars chasing too few goods. Deflation - falling prices of goods and services coupled to an increase in the real value of money. Right now we have falling prices with relatively stable value of money. Now, tell me where I am wrong in anything that I have "stated" above.
Tull Comes Home: "HI honey...I'm home..."Where have you been?" "Boinking my fellow moderator...now shut up and make me dinner..."
Do they cite in the article, by what methodologies they came to their conclusion? Do they cite ANY empirical data, which can be verified? Of course not. The article is bullshit. Your attempts to flog the dead horse you posted, have failed. You should be used to it by now, though. Moron. This is GREAT lib:):) The 2 Uber-ist fakes on the site are bitch slapping each other around!!! Wonder which fag will draw the .......... BBBBBBBBBOOOOOOOOOOZZZZZZZZOOOOOOO......."big gun" from their spandex - lycra pantyholster first???????? I'm going to go with Erica to get the drop on dwarf. 5 dollars via paypal.
Death to everybody who does not get outta my way. Below is the latest Dwarf revelation: ...."the shorts and bibs I wear are of a carbon/lycra/nylon composition......and maaaaaannnnnn....just letting everybody know that makes my balls SWELL......I'm just tooooooo sexy for you all!!" ....Dwarf August 2010.............. And one from the bluehair 2-legged GPS "I always get the Carolinas mixed up for some reason." ......Fred Jerx (who will doubtless figure out the intricacy of that tricky "North / South" thing someday. Ahldoafewboners = the kind of person who can say absolutely nothing, and mean it.....aka Regurgitated Clown Floyd
5 dollars via paypal. (lol, love the Paypal reference) I agree. Dwarf's the Loser in this one. Btw, I predict Freddy shows up to ask Dwarf if he's run over any butterflies with his car lately (no sh*t - an actual recent "event" in Freddy's life.)
Since the Second World War, real GDP in the United States has grown, on average, at a yearly rate of 3.2 percent.
The duplicitous turd
Mad dog gets
"calibrated..."
#2. To: Capitalist Eric (#1)
(Edited)
What were they assuming as the inflation rate?
#3. To: war (#2)
3.2 is real GDP [GNP] which is nominal-deflator.
The duplicitous turd
Mad dog gets
"calibrated..."
#4. To: Capitalist Eric (#3)
#5. To: war (#4)
The duplicitous turd
Mad dog gets
"calibrated..."
#6. To: Capitalist Eric (#5)
(Edited)
#7. To: Liberator (#5)
(Edited)
Do you know the difference between inflation and deflation? Do you understand the difference between +3.2 and -3.2?
#8. To: e_type_jag (#7)
I'm going to go with Erica to get the drop on dwarf.
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