CERF Blog
The Fed’s national wealth report for the second quarter is out today. For a New-Classical Macroeconomist, this is one of the most important data releases. Wealth is one of the most important theoretical drivers of consumption, and it is one of the drivers in our forecast model of the United States economy.
National wealth, i.e. assets minus liabilities, fell $1.5 trillion to $53.5 trillion in the second quarter. This fall was driven mostly by declines in equity markets. Softening equities drove declines in three major asset categories: corporate equities, mutual funds (sixty-percent equities), and pension funds (sixty-percent equities). The combined decline of these three asset types was $1.86 trillion. Changes in other assets include: a $109 billion decrease in Cash, a $72 billion increase in Bonds, a $50 billion increase in Household Real Estate, a $17 billion increase in Consumer Durables, and a $166 billion increase in non-corporate business equity.
On the liability side, changes were relatively small with total liabilities falling about $34 billion, driven mostly by falls of $50 billion in mortgage liabilities that were offset by various other small changes in other liability categories.
The previous figures are all seasonally unadjusted data.
Seasonally adjusted second quarter debt levels expanded at an annualized quarterly rate of 4.75 percent, driven by increases in federal government debt. State and local government debt fell 1.25 percent, household debt fell by 2.25 percent, and nonfinancial business debt was unchanged. Federal government debt rose by 24.0 percent during the second quarter, up from 20.0 percent during the first quarter.
I am encouraged by the gradual household sector rebuilding of assets and liabilities. The Federal debt situation could be a tricky one if current policies do not lay the foundation for rapid GDP growth needed to pay the growing liabilities.
The short-term GDP forecast implications are for slow consumption growth given that wealth is falling. However, once household balance sheets are restored to health, private sector growth can potentially resume.