Fisher Investments Editorial Staff
US Economy

Yesterday’s Breaking News

By, 06/15/2009

  Story Highlights:

  • The latest Federal Reserve's Flow of Funds report showed US household wealth dropped by $1.3 trillion in Q1 2009 from Q4 2008, largely tied to stock portfolio losses and home prices slides.
  • Household wealth has some measurable impact on consumption, but consumption's sensitivities to home values and investment portfolios are lower than to income.
  • By nature, government reports show what has happened and are often just tautologies of previously released information—they generally never contain new news.

_______________________________________________________________________

How many ways can you say something? If you're the government, chances are you can say things more ways than Hallmark can say "Happy Birthday!" Take the latest Federal Reserve's Flow of Funds report. The report showed US household wealth—a measure of assets like homes, checking accounts, and investments minus liabilities like mortgages and credit cards—dropped by $1.3 trillion in Q1 2009 from Q4 2008. The fall was largely tied to stock portfolio losses and home prices slides. If you can bring yourself to recall January through March, this report should come as no shock.

Still, some treat yesterday's news as breaking news and argue the reported household wealth reduction will translate to more consumer thriftiness down the line. Dampened US consumer spending—which contributes about 70% to GDP—wouldn't be so great for an economic recovery. But note, Q1 ended in March and retail sales actually posted gains in May. Consumers are undoubtedly spending less today than before the recession, but the pullback's far less than the decline in household wealth.

Fact is, it's wrong to equate a big drop in household net worth to an equal-sized drop in consumer spending. (Just as rises in household wealth don't equal the same increase in consumer spending.) Household wealth has some measurable impact on consumption, but consumption's sensitivities to home values and investment portfolios are much lower than to changes in income. And income over the years has been less wildly variable than stocks or even home values—allowing consumers to plot future consumption habits more steadily. Encouragingly, despite the weakened economy, both personal and disposable income rose in April, at 0.5% and 1.1%, respectively.

By nature, government reports show what has happened and are often just tautologies of previously released information—they generally never contain new news. That doesn't stop some folks from making a fuss about them, so it's important to always look at the bigger picture. The fall in household wealth isn't insignificant, but it won't hold back economic or stock market recovery. It's a relatively small piece in a large and complex economic machine—and one that's hardly surprising. The fact markets had little reaction shows it's old news.

These days, we may all be collectively a little poorer, but at least we don't suffer from a lack of government reports.

 

 

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

Click here to rate this article:



*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

Subscribe

Get a weekly roundup of our market insights.Sign up for the MarketMinder email newsletter. Learn more.