Wealth rises but economy still sputters: James Saft

March 6, 2014

(James Saft is a Reuters columnist. The opinions expressed are his own)

By James Saft

(Reuters) – Americans are richer than ever and increasingly willing to take on a bit of extra debt and yet the overall atmosphere, and the economic recovery, are surprisingly flat.

That’s because the rise in wealth is highly concentrated, consumer debt is often going towards maintaining living standards in the absence of adequate income and, perhaps most importantly, businesses are simply not investing, very likely because they have a keen grasp of the first two points.

Household net worth rose nearly $3 trillion in the fourth quarter, up 3.8 percent, registering a 14 percent gain for 2014, according to Federal Reserve data released on Thursday. (here)

This was all courtesy of an 11.6 percent annual gain in housing wealth and a whopping 12.6 percent rise in households’ financial assets like stocks and bonds.

While the gain in household wealth is an all-time high, if you adjust for inflation, financial assets are up 10 percent from their pre-recession peak but real estate assets are still 7.8 percent below where they were before the bubble burst.

That’s important because homeownership is more widespread than the owning of financial assets, which is very heavily concentrated among the wealthiest.

While we are getting a wealth effect from what very well may be a bubble in financial markets – indeed that effect is one of the main aims of quantitative easing – there are only so many Jimmy Choo shoes and beachfront houses a one-per-center needs.

Given that so many would-be buyers of housing are shut out of financing markets due to what may be absolutely sensible new guidelines, the potential for continued appreciation of real estate, which would spur economic growth, is limited.

A deeper look at the data shows a willingness to take on more debt, with overall household liabilities up 1.2 percent in the quarter. That debt, however, is concentrated in consumer debt, notably student loans, with the amount of outstanding mortgage debt actually falling by $10 billion in the quarter.

And yet, despite record wealth and growing debt, we are looking at a spluttering economy, still growing well below its long-term trend and potentially in the latter, stale stages of a recovery. And though there has been lots of talk about fiscal retrenchment (and arguably a need for stimulus) what we’ve actually had is just a slowdown in the growth of official sector debt, which rose 2.8 percent last year, the slowest rate since 2007.

STUDENT LOANS FOR RENT?

The amount of student loans outstanding has more than doubled since 2008, standing now at $1.1 trillion. And yet there are growing indications that many borrowers are spending the money on things other than education, an issue explored by a piece in The Wall Street Journal this week which showed anecdotal evidence of people simply borrowing to live. (here)

The data is also disturbing. About 25 percent of students taking out loans in the 2011-12 school year borrowed at least $2,500 more than their share of tuition, according to Edvisors.com.

And a report by the Inspector General of the Department of Education found lapses in lending to students in distance learning programs. (here)

At the eight programs audited by the report more than $220 million in loans were made to 42,000 students who didn’t earn any credits.

An economy divided between asset owners spending a slice of their bubble gains and hard-up people taking out student debt to live is clearly not sustainable.

Returning to the Fed report we see clear evidence of why we find ourselves with such low growth: sparse investment by corporations. Corporate capital expenditure minus internal funds was negative $159 billion during the fourth quarter, meaning that rather than borrowing to invest as they usually do in expansions companies are piling up cash. This marks the 20th straight quarter of this behavior.

That cash hoarding and low investment create a natural cap on the potential rate of expansion in the economy.

There are a number of competing explanations for why this is happening. It’s possible that executive compensation programs make longer-term investment less attractive to those making the decisions, or it seems equally possible that after a damaging recession and given the general low spirits in the economy managers are simply being cautious.

Two things seem clear from all of this. First, extraordinary monetary policy, while it may have been needed in the throes of the crisis, has long passed the point of diminishing returns.

We could pump the market up another 15 percent, but we’ll just get more WhatsApps, not more genuine growth.

Second, just because it is no longer working that well doesn’t mean it won’t cause pain when we take QE away.

Next year’s report may very well show less wealth but leave us with pretty much the same debts.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at jamessaft@jamessaft.com and find more columns at blogs.reuters.com/james-saft)

(Editing by James Dalgleish)

2 comments

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“so many would-be buyers of housing are shut out of financing markets due to what may be absolutely sensible new guidelines”

That just means that they can spend their money on consumer goods. Rising or falling house prices only have a psychological effect in most cases as people go on living in a house that is the same size, location, etc as it was before the price change.

Posted by walstir | Report as abusive

Corporations aren’t the only ones hoarding cash. Individuals are too. Some of us anyway.

Posted by Missinginaction | Report as abusive