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Economy in Brief

U.S. Leading Indicators Rise ForAFifth Straight Month And Signal Economic Recovery
by Tom Moeller  September 21, 2009

Extraordinary developments continued to characterize the US financial system through Q2, as indicated in the Federal Reserve's flow-of-funds accounts, published today at noon.  Two sectors in particular caught our attention, households and the federal government, each for opposing reasons.

First, after six consecutive quarters of deterioration, household net worth finally experienced an improvement.  It increased $2.0 trillion to $53.1 trillion.  The biggest gains came from the upturn in the stock market, which added $1.1 trillion to people's assets.  Additionally, mutual fund holdings gained $486 billion, and pension fund reserves -- largely invested in equities, of course -- added $742 billion.  Among tangible assets, household real estate values rose by $323 billion following nine consecutive quarters of erosion.

 Household financial positions also improved because they continued to pay down liabilities.  These changes were small compared to the asset moves, but clearly still in a favorable direction; total liabilities fell $35 billion in Q2, the fourth reduction in the last five quarters.  Mortgage debt and consumer credit had the largest declines, while conventional bank loans increased.

In these comparisons, the concept of "mortgage equity withdrawal" plays a role.  Homeowners' equity in real estate increased in Q2 by $353 billion.  It had contracted in 12 of the last 13 quarters, a span extending back to the beginning of 2006 and interrupted by just a token increase in Q4 2006.  For the first year of this period, the reductions were evidently deliberate on the part of consumers, who borrowed heavily against their properties.  Such "mortgage equity withdrawal" became a popular addition to economists' tools for forecasting consumer spending, which could be larger still when income was augmented by liquidations of home values.  This practice dwindled rapidly however as real estate prices began to decline in 2007 and according to the Haver measure, "MEW" turned negative last year.  So people began borrowing a smaller portion of the value of the real estate they were purchasing or remodeling to try to hold a larger equity stake.  In the aggregate this effort was subverted by the the continuing decline in real estate prices in general.   Finally, though, this last quarter saw homeowners' equity go up.  As noted above, the value of real estate increased some $323 billion.  Our measure of MEW declined by about $90 billion, and mortgage debt itself was paid down by some $29 billion.  As a media headline writer noted recently, once again, the main function of a home is returning to that of residence, not a resource to pay for something else.

Separately in this flow-of-funds report, we were also struck by the magnitude of the federal government's borrowing, and just one small comparison will suffice to illustrate.  In these data, it's the historical comparison available through the time series that helps put these things in perspective.  It's easy to joke about "a trillion here and trillion there", but here's a new way to look at these numbers.  In Q2, net new issues of Treasury securities were just under $339 billion.  In this one three-month period, at a time of year when tax inflows usually mean the Treasury borrows little or even pays down on the debt, the Treasury borrowed more than it had in any whole year before 2003.  And this latest quarter's new debt was in fact seasonally small: the prior three quarters had averaged $518 billion, easily larger than any whole year ever -- until 2008. 

End of Year
Flow of Funds (Y/Y % Chg.) % of Total Outstanding 2Q '09 1Q '09 End of Year
2008 2007 2006
Total Credit Market Debt Outstanding -- 3.0 4.2 5.0 10.4 9.8
    Federal Government 13.6% 35.9 28.3 24.2 4.9 3.9
    Households 25.9% -1.2 -0.7 0.3 6.6 10.0
    Nonfinancial Corporate Business 13.8% 2.9 4.4 5.3 14.2 8.4
    Nonfarm, Noncorporate Business 6.9% -1.7 1.4 4.9 12.6 14.7
  Financial Sectors 31.3% -0.9 3.7 5.5 13.4 9.9
 Trillions of $            
Net Worth: Households & Nonprofit Organizations -- $53.140 $51.141 $52.917 $62.911 $63.335
  Tangible Assets: Households -- $24.847 $24.660 $25.177 $27.526 $28.724
  Financial Assets: Households -- $42.361 $40.584 $41.957 $50.703 $48.025
  Total Liabilities: Households -- $14.068 $14.103 $14.217 $14.318 $13.414
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