I had been meaning to follow up after last week’s Z.1 report came out and it totally slipped my mind. It is, in my view, one of the most important documents the government releases. Which is funny because it doesn’t get much attention. Anyway, here are some general takeaways:
The government’s deficit continues to contribute to private sector saving. An update of the 3 sector financial balances shows that the deficit is still positively contributing to household net worth. That is, since the government’s deficit results in the creation of a non-government asset (but not a non-government liability) it increases our financial net worth. At a time when balance sheets need all the help they can get following a debt deleveraging this continues to be a modest positive for the private sector.
At a level of just 2.5% this has come way down from its recovery high of 11.1% back in 2009.
The growth in private investment has offset the decline in the deficit to a large degree. Back in 2013 when many people said the sequester would cause a recession, I was vocally saying that private investment was strong enough to offset this. That proved right and we’ve continued to see this power upward. As a percentage of GDP, private investment is at its highest levels since the recession:
Household and private sector net worths are at all-time highs. This is due, in large part, to the rally in the equity markets. But equity holdings as a percentage of net worth remains relatively low in historical terms. This is important to note in a world where financial assets have become increasingly important as a part of our overall ability to spend. For instance, we all remember the housing ATM stories back during the housing bubble. This was powering the economy forward to a large degree because housing, as a percentage of net worth, had growth upwards of 20% relative to a historical average of about 17%. So, when the housing bubble burst it had an outsize impact on balance sheets due to the sheer size of real estate as a percentage of net worth. The same story cannot be said of equities at present despite the big run-up.
