It’s the end of the week. Let’s take a mini deep dive into some of the reports this week regarding the economy. For some reason, I find this stuff interesting. Economic forecasting is one of those under-valued fields. Nevertheless, it’s important. Let’s dive in:
The Federal Reserve released the Q4 2021 Flow of Funds report today: Financial Accounts of the United States. To note, economists are still trying to nail down how much money was drained during the pandemic. Savings were obviously unbelievably high during Covid, at a 30% average. Most likely the inherent fear of not knowing how long it would last, is what drove people to save more than 3x the usual average. The savings rate is back around 7%. The economy is going to slow this year as assistance from the pandemic starts to fade. The question is, how much will we see it pullback? And will the inflation rate bring us close to official recession levels?
Economists at Goldman Sachs Group Inc. cautioned that the likelihood of a U.S. recession in the coming year might be as high as 35%, as they lowered their growth predictions owing to the impact of high oil prices and other consequences from the Ukraine conflict.
Here are some of the stats for this week’s economic recap:
The net worth of households and nonprofits rose to $150.3 trillion during the fourth quarter of 2021. The value of directly and indirectly held corporate equities increased $2.5 trillion and the value of real estate increased $1.5 trillion.
Household debt increased 8 percent at an annual rate in the fourth quarter of 2021. Consumer credit grew at an annual rate of 6.9 percent, while mortgage debt (excluding charge-offs) grew at an annual rate of 8 percent.
With the sharp decline in GDP in Q2 2020, net worth as a percent of GDP increased sharply and then declined somewhat. But now net worth as a percent of GDP is at a new all-time high. This includes real estate and financial assets (stocks, bonds, pension reserves, deposits, etc) net of liabilities (mostly mortgages). Note that this does NOT include public debt obligations.
In Q4 2021, household percent equity (of household real estate) was at 69.2% – up from 68.8% in Q3 This is the highest percent equity since the 1980s.
Note: about 30.3% of owner-occupied households had no mortgage debt as of April 2010. So, the approximately 50+ million households with mortgages have less than 67.7% equity – and about 1.1 million homeowners still have negative equity.
The value of real estate, as a percent of GDP, increased in Q4, and is well above the average of the last 30 years.
The DOL reported:
“In the week ending March 5, the advance figure for seasonally adjusted initial claims was 227,000, an increase of 11,000 from the previous week’s revised level. The previous week’s level was revised up by 1,000 from 215,000 to 216,000. The 4-week moving average was 231,250, an increase of 500 from the previous week’s revised average. The previous week’s average was revised up by 250 from 230,500 to 230,750.”
The graph below shows the relative initial weekly unemployment claims. In the blue are times of recession. The red is initial claims, and the dashed line on the graph is the current 4-week average.
Weekly numbers were higher than the consensus forecast with average unemployment claims increasing to 231,250.
Here are large institutional thoughts on forecasts for Q1:
This week’s trade and inventory data along with some adjustments to assumptions left our 1Q GDP tracking estimate unchanged at 1.0% quarter-over-quarter seasonally adjusted annual rate. [March 11 estimate]
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2022 is 0.5 percent on March 8, up from 0.0 percent on March 1. [March 8 estimate]
The Economy: A Peek
According to National Retail Federation Chief Economist Jack Kleinhenz, inflation is at a 40-year high, but it isn’t affecting all customers as severely as the headline numbers suggest. Consumer concerns about rising costs, however, may become self-fulfilling if employees want higher salaries to compensate, and will play a part in the Federal Reserve’s efforts to limit inflation.
Kleinhenz explained: “After decades of relatively low levels, inflation is on everyone’s mind and has been making consumers and businesses miserable as prices have picked up dramatically over the past year…However you measure it, inflation has become a powerful force and plays a key role in the nation’s economic outlook.” He concluded: “Headline inflation numbers may mask what is being faced by different consumers since spending patterns vary widely and lead to significantly different inflation experiences. What a person buys can have a tremendous effect on how severely the pain of inflation is felt.”
According to the Federal Reserve Bank of New York’s latest Survey of Consumer Expectations, consumers expect inflation to rise 5.8% next year, somewhat less than in 2021 but still significantly above pre-pandemic levels seen during the Trump Admin.
However, the high rates are not likely to last for long, with consumers expecting a relatively regular 3.5 percent over the next three years, according to the survey.