American’s are Almost as Wealthy as Ever, it is Scary
Americans are about as wealthy as they have ever been and that is worrying monetary officials.
They are concerned that the growing wealth could prove unsustainable because it has outstripped the growth of the economy since the Great Recession’s storied end in Y 2009.
A former (ret.) senior official says in effect that we have seen this picture before.
Household net worth ballooned in the late 1990’s and the early 2000’s; in the 1st instance pumped up by rising stock prices, in the 2nd by expanding home values. Both cases ended badly, with the economy falling into recession after the Fed burst the bubbles.
The same thing could happen again.
Just as occurred in the prior episodes, the latest expansion of wealth has been driven more by rising prices of assets, in this case both equities and residential property than by improved economic fundamentals.
Since Y 2009, households have seen their holdings of stock and mutual funds nearly 2X, to $20.6-T. Just 6% of that gain can be ascribed to new flows of money into the funds or share purchases, according to calculations by AllianceBernstein LP in New York. The rest is due to price appreciation.
As a share of disposable personal income, household net worth hit a record high 652.7% in Q-1 of Y 2015. For comparison, the high during the housing boom was 648.3% at the end of Y 2006. It has since slipped, to 640.4% on 31 March of this year, as equity and house price gains have slowed.
Despite this, there are reasons to expect the economic expansion to continue, perhaps for another 3 to 4 years. Outside of the energy sector, company profit margins are elevated and costs largely contained, and household debt burdens are manageable.
The problem is that the financial cycle is way ahead of the economic cycle. That is a worry given that the past 2 downturns were driven by asset-price deflation.
Nobody knows what will happen and when. But, there is reason to think that is a scary scenario. Consider the pain that will be suffered when the gravitational pull takes hold.
Caution is the rule in here.