U.S. Flow of Funds Indicate Further Shrinkage of Balance Sheets

Since the peak in 2Q 2007, the net worth of the U.S. household & nonprofit sectors' has fallen by $13.8 trillion, or by nearly one-quarter. The decline to its lowest level since 2004 was led by the rapid shrinkage in asset values, namely of stocks and real estate. Over just the last four quarters alone, the decline totaled $9.8 trillion. Over that period, the value of the household sector's financial assets fell by $7.9 trillion as the value of equity market shares fell by $3.3 trillion, or by 39.1% y/y, and mutual fund share values also fell by $1.3 trillion, or 28.4%. In addition, pension fund reserves were hit by $2.78 trillion during the year or by 21.2%. Tangible asset values suffered somewhat less than financial values but they still were down sharply. Over the last year, the value of tangibles overall dropped $2.2 trillion (-8.3%) as the reduction in real estate values totaled $2.3 trillion or 10.3%.

Accompanying the decline in the household sector's asset values was a reining in of liabilities. Total credit market liabilities of the household sector rose just 4.4% during the last four quarters, the weakest advance since 1954 (no typo). And all sectors pulled back their borrowing -- except the Federal government whose liabilities grew a record 28.3%. Non-government domestic liabilities retreated as the recession generated further deleveraging. These liabilities fell for the second quarter and were up a record slow 1.2% year-to-year. Credit market debt owed by the household sector dropped sharply for the second straight quarter (-0.6% y/y). After two quarters of breathtaking decline, mortgage borrowing inched up 1.6% (-1.0% y/y). Consumers also were of a mind to reduce credit liabilities which they did by a record $75.3 billion (-0.4% y/y). With the third decline in the last four quarters, the value of bank loans was up just 1.9% y/y, the least since 2005.

Credit market debt owed by the financial sector contracted and reversed roughly one-third of a 4Q rise. Year-to-year growth of 3.7% was down from a peak of 13.4% back in 2007. Liabilities of commercial banks rose 31.4% y/y but savings institutions liabilities fell for the fourth straight quarter (-25.3% y/y).

The liabilities of the foreign sector increased for the first quarter in the last three but year-to-year growth was a negative 9.0%.

Credit Quantity and Credit Quality: Bank Competition and Capital Accumulation from the Federal Reserve Bank of New York can be found here.

Good news seems better than bad news. That's an obvious statement, but it's behind the recent rise in the University of Michigan's early-June reading of consumer sentiment. At 69.0 the latest index level was roughly unchanged from May and it about matched Consensus expectations. The increase bodes well for the consumer spending outlook because during the last ten years, there has been a 61% correlation between the level of sentiment and the growth in real spending during the next five months.

The current economic conditions jumped ten percent from May to its highest level since last September. The reading for current personal finances just about made up the May decline. however, it was the jump in the reading of current conditions for buying large household goods to the highest level since March of last year that powered the increase. Showing a huge increase was the reading of current conditions for buying a motor vehicle. Though conditions for buying a house slipped, the level remained up sharply from last year.

The expectations component of consumer sentiment slipped this month from May but it remained near the highest level since early last year. Expectations for personal finances rose with higher stock prices but expected business conditions during the next year slipped. Expected conditions during the next five years similarly slipped. Both of these readings remained, however, from their lows of earlier this year. Though unemployment was expected to decline over the next twelve months, price inflation was expected to heat up. Interest rates were expected to fall

The opinion of government policy, which may eventually influence economic expectations, fell this month after having jumped through May. It remained near the highest level since 2002. A reduced 22% of respondents thought that a good job was being done by government while an increased 29% thought that a poor job was being done. Nevertheless, despite these monthly changes, the trend is still very much toward a favorable reading of policy actions.

Inflation expectations for the next year rose further to 3.8%. That compares to a low of 1.7% last December but remained down from a reading which was as high as 7.0% last May.

The University of Michigan survey data is not seasonally adjusted. The reading is based on telephone interviews with about 500 households at month-end; the mid-month results are based on about 300 interviews. The summary indexes are in Haver's USECON database with details in the proprietary UMSCA database.

Jobless Recovery Redux? from the Federal Reserve Bank of San Francisco can be found here.

During May, U.S. import prices moved higher again due to recent increases in oil prices The expected 1.3% gain followed a similar 1.1% rise during April and, since January, prices have risen by 2.9%. Nevertheless, earlier declines in prices were severe with the start of the global economic recession. Therefore the y/y change in import prices remained a negative 17.6%.

Higher petroleum prices have accelerated recent import price gains. The 8.3% increase last month was the fourth firm consecutive monthly rise and another strong gain is in store for this month. The price for a barrel of Brent Crude oil yesterday rose to $71.55. That's up nearly seven dollars, or ten percent, from the end of May. Crude oil prices have returned to where they were last October.

Non-oil import prices have firmed as well, though nowhere near as dramatically as oil. The lower value of the dollar as well as a firming U.S. economy undoubtedly were behind the 0.2% price uptick in May which left prices roughly flat over the last three months. While not strong, by any means, the stability compares to three-month price declines of 3.5% as recently as this past January. (During the last ten years, there has been a negative 81% correlation between the nominal trade-weighted exchange value of the US dollar vs. major currencies and the y/y change in non-oil import prices.) 

During May, capital goods import prices were unchanged after a 0.1% uptick during April. On a three-month basis, prices fell 0.3% after the 0.9% decline during March. Excluding computers, capital goods prices were unchanged in May and three-month growth remained a low -0.4%. Prices of computers, peripherals & accessories rose 0.2% last month but they were down 0.3% during the last three months. Regardless of that firming, computer prices remained 6.4% lower than last year.

Prices for nonauto consumer goods were unchanged in May, but here again there has been some firming versus earlier declines. The three-month rate of change amounted to -0.2% which compared to a -0.7% change as recently as January. Durable consumer goods prices rose 0.4% over the last three months after a -1.7% decline through January. Household goods and home entertainment equipment prices have firmed considerably. Moving the other way, declines in apparel prices have offset some of that strength in durables.

Total export prices have firmed and accompanied the gains in import prices. Last month they rose 0.6% led by a 3.6% (-14.7% y/y) rise in agricultural prices. Nonagricultural export prices also have firmed but not to the same degree. Last month they rose 0.3% and over three months they were up just 0.1% following a -6.0% decline as of the end of last year.

The import and export price series can be found in Haver's USECON database. Detailed figures are available in the USINT database.

Risks and Resolutions: The "Day After" for Financial Institutions - A Conference Summary from the Federal Reserve Bank of Chicago can be found here.  

Industrial output fell again in April marking the 12th straight month of decline in Yr/Yr output; industrial output has gone 12-months without a month to month gain as well (m/m output was flat in August of 2008).

Declines spread across all major output categories in the month. In terms of the sequential growth rates (3m compared to 6mo compared to 12mo) there is improvement in train for intermediate and capital goods but consumer goods output trends are getting progressively worse. The overall trends show that after a worsening in the growth rate at 6-months, the three-month growth rate has limited its pace of decline to -18.9%.

Obviously the picture for EMU is still poor. Output is declining on a broad front and still falling sharply on that broad front. There are some signs that the output declines are abating. The signs from the EMU index are the weakest. Strongest signs of a turnaround come from the patterns in the large EMU economies.