Shocking Fed Survey on Consumer Finances (Halbert)

by Gary D. Halbert

June 19, 2012


1.  Greece Avoids “Drachmageddon” For Now

2.  Americans’ Net Worth Plummeted in 2007-2010

3.  Household Net Worth Plunges 39%

4.  The “New Normal”?

5.  Fed Policy Announcement Due Tomorrow

6.  Americans are Definitely Discouraged


Today we focus on a new Fed study which found that Americans’ net worth plunged almost 39% in the period from 2007 to 2010. That period included the so-called Great Recession, a financial crisis and a severe bear market in stocks. There are lots of interesting statistics to look at in this new Fed study.

I would be remiss not to comment on the results of the Greek elections on Sunday. As I suggested in my Blog on Friday, the mainstream New Democracy party prevailed and defeated the left-wing Syriza party that vowed to default on Greece’s debt and exit the euro. It remains to be seen what happens in Greece going forward, but hopefully it is off the front pages at least for a few weeks.

The Fed Open Market Committee (FOMC) is in session as this is written. Rumors abounded last week that the Fed would vote to enact more “quantitative easing” at this meeting. I have also discussed that possibility in recent weeks. While we won’t know anything until tomorrow afternoon when we get the official policy statement, the markets are anticipating some new stimulus in one form or another. As for me, I’m not so sure.

Greece Avoids “Drachmageddon” For Now

I went out on a limb in my Blog on Friday by predicting that the New Democracy party would win the Greek election on Sunday, and that the left-wing Syriza party would lose. Syriza had promised to default on Greece’s debt and exit the euro. Here is what I wrote:

“There’s an old political saying: ‘Most people will not vote for anarchy.’ If I had to guess, I think the New Democracy party stays in power. I don’t think even the Greeks will vote for anarchy. But I could be wrong.

One thing that makes me think this is the behavior of the stock markets the last two days. You would have thought there would be huge selling to get out before the elections in Greece on Sunday. Instead the markets rallied strongly.”

Greece’s center-right New Democracy party won the election by a narrow margin of 29.7% to 26.9% for Syriza. Obviously, neither party came close to winning a majority of the vote. Antonis Samaras of the New Democracy party is the new Prime Minister of Greece. He now has three days to try to put together a new coalition government.

The vote was widely seen as a Greek referendum on staying in the euro, the currency used by 325 million people across 17 countries in Europe. The vote also suggested that more Greeks think the government should not default on its debts but, again, the margin was very narrow. The leader of the Syriza party vowed to oppose the new Prime Minister at every turn.

The New Democracy party will now have 129 seats in the 300-seat parliament, whereas Syriza won only 71 seats. This means that Samaras will have to reach out to other political groups if he is to be successful in forming a new coalition government. The results remain to be seen.

Irrespective of Sunday’s election results, the Greek debt crisis is far from over, but Greece is probably off the front pages for a few weeks. The focus now shifts back to Spain, which I wrote about in detail on June 5. Yields on Spain’s 10-year bonds soared to a new record near 7.3% on Monday after Moody’s downgraded Spain’s debt three notches to just above junk status.

The situation in Spain is very serious and will continue to negatively affect global stock markets just ahead, in my opinion. It remains to be seen if Italy will be next. I’ll keep you posted.

Americans’ Net Worth Plummeted in 2007-2010

Every few years the Federal Reserve conducts an in-depth survey on changes in consumers’ net worth and income across the country. Known as the Survey of Consumer Finances (SCF), the latest study covers the period from 2007 to 2010. The survey looks at such things as median family income but also family net worth, which considers all assets such as a home, savings, investments and other assets. The latest survey results were published last week.

The Fed surveyed over 4,400 households in 2007 and another almost 6,500 in 2010. Americans voluntarily answer questions about their net worth. For upper income people who don’t tend to cooperate very well, the Fed resorts to IRS tax returns and other methods to estimate the income and median net worth. All in all, the Fed survey is considered to be a reliable snapshot of families’ net worth across various regions of the country. Here are some of the numbers.

It came as no surprise that median household wealth declined from 2007 to 2010. We had the worst housing bust on record, with home values plunging by 60% in some areas of the country. While home prices have bottomed in some areas, prices are not rebounding strongly even with mortgage rates at record lows.

Another big contributing factor was the stock market crash. The Dow Jones Industrial Average peaked at 14,164 on Oct. 9, 2007 and then plunged by more than half, to 6,547 on March 9, 2009. While the stock markets have recovered much of the lost ground over the last three years, many Americans bailed out during the recession and never got back in.

While the housing bust and the stock market crash were known to have reduced household net worth, few expected the numbers to look this bad in the latest Fed survey. Hold onto your hats!

Household Net Worth Plunges 39%

The median family net worth plunged from $126,400 in 2007 to only $77,300 in 2010. That’s a decline of 38.8% over the period! That is the lowest number since the Fed’s 1992 survey showing a median net worth of $77,244 (adjusted for inflation).

Put another way, two decades of accumulated prosperity simply vaporized in 2007-2010.

But there’s more bad news from the latest Fed survey. Families’ incomes also continued to decline, a trend that predated the financial crisis but accelerated over the same period. Median family income fell from $49,600 in 2007 (adjusted for inflation) to $45,800 in 2010. Note that these numbers are already 18 months old, and conditions could actually be worse today.

Middle-class families were hit hard in both wealth and income during the crisis, limiting their ability and willingness to spend. The recession and the financial crisis did reduce income inequality in the US, at least temporarily, according to the Fed survey. The data show that the average income of the wealthiest families fell much more sharply than the median income, indicating that some of those at the very top of the ladder slipped down at least a few rungs.

The share of families saving anything over the previous year fell to 52% in 2010, down from 56.4% in 2007. Other government statistics show that total savings have increased modestly since 2007, suggesting that a smaller group of families is saving more money, while a growing number manage to save nothing.

The survey also found a shift in the reasons that families set aside money, underscoring the lack of confidence that is weighing on the economy. More families said they were saving money as a precautionary measure, to make sure they had enough liquidity to meet short-term needs. Fewer said they were saving for retirement, or for education, or for a down payment on a home.

The report underscored the limited progress that households had made in reducing the amounts that they owed to lenders. The share of households reporting any debt declined by 2.1% over the last three years, but 74.9% of households still owed something, and the median amount did not change.

The decline in reported incomes could have increased the weight of those debts, tying up a larger share of families’ take-home pay. But one of the rare benefits of the crisis, historically lower interest rates, has helped to offset that effect (credit cards not withstanding). Families also have been able to reduce debt payments by refinancing into mortgages with longer terms and deferring repayment of student loans and other obligations.

The survey also confirmed that Americans are shifting the kinds of debts they carry. The share of families with credit card debt declined by 6.7% over the period to 39.4%, and the median balance fell 16.1% to $2,600. Families also reduced the number of credit cards that they carried, and 32% of families said they had no cards, up from 27% in 2007.

The “New Normal”?

You might be tempted to think that this is just a temporary setback, and that when the economy returns to normal, the typical household will begin to recover from two decades of financial decay. But don’t count on it. Household wealth in the US rests primarily on two things: housing and wages.

There is evidence, as I discussed on May 29, that housing prices have stopped declining in several regions of the US, although some other areas have not stabilized yet. However, while housing prices are stabilizing generally speaking, they are unlikely to enter a new bull market anytime soon. Instead, at best they will probably track GDP growth, as they historically do.

Nor can we expect to see wages rise substantially. Why? Because there are apprx. 15 million people who don’t have jobs. It will be a very long time before these people are absorbed into the labor force again. Until this huge inventory of willing and able labor is put to use, don’t expect wages to go up very much.

This is especially true given that President Obama announced last Friday that he is granting work permits for some 800,000 illegal aliens (it will be more than 800,000 before he’s done). Congress defeated Obama’s first attempt at this, the so-called “Dream Act,” handily.

This latest Executive Order from Obama is very controversial, but we can only assume that White House polling showed that it would be a net positive for the president. That remains to be seen. While the edict will win some Hispanic votes, it remains to be seen how mainstream voters will react come November.

Now a few final thoughts on the Fed consumer survey. Many people were shocked by the latest household survey by the Fed. The 39% plunge in median net worth made headlines everywhere. The question is, where do we go from here? The answer may well be more of the same.

The US economy has a long history of rebounding strongly from deep recessions, but something is different this time around. One reason for that, in my opinion, is the debt overhang. Our national debt has exploded from $10 trillion just few years ago to over $15 trillion today. Trillion-dollar annual budget deficits have become the “norm” under President Obama.

Americans know this can’t continue forever and that the solution to runaway debt will be very painful at some point. Surveys show that most American parents don’t believe their children will enjoy the same lifestyle that most of us have. And finally, there are growing fears that we may be slipping into a new recession.

Fed Policy Announcement Due Tomorrow

The Fed Open Market Committee (FOMC) is meeting today and tomorrow to set monetary policy for the next couple of months. A great deal has been written about this particular FOMC meeting and the likelihood (or unlikelihood) that the Fed will announce a new round of stimulus.

If the Fed feels compelled to implement more stimulus, it is widely agreed that such action would come in the form of expanding “Operation Twist” (swapping short-term Treasuries for longer-dated ones) or a new round of “Quantitative Easing” (QE3).

The feeling is that if the Fed is going to add more stimulus, it needs to do it at this week’s FOMC meeting. If the Fed waits until later in the year to add more stimulus, it might well be seen as a political move to goose the economy ahead of the election. The next FOMC meeting is on July 31/August 1 and the next on September 12-13.

Around 1:00 p.m. EST tomorrow, the FOMC will release its official policy statement from the meeting. The statement may, or may not, indicate if the FOMC voted to approve more stimulus – either extending the Twist or QE3. We just have to wait and see. However, Fed Chairman Bernanke will hold a press conference after the meeting, and his comments will tell the story.

Over the last couple of weeks, we have seen a lot of disappointing news on the US economy, while at the same time the news from Europe has been increasingly troubling as I wrote on June 5. As a result, there has been a growing drumbeat for the Fed to do something in the way of additional stimulus at this week’s FOMC meeting.

But as I explained in my Blog on June 8, I have some doubts. Here’s what I wrote:

“I was not so convinced [about more Fed stimulus], especially after reading yesterday’s Fed “Beige Book” report. The Beige Book is a report published eight times a year by the Fed and is a summary of business surveys taken by the 12 regional Federal Reserve Banks. Yesterday’s Beige Book was decidedly upbeat about the economy and even jobs. This came as quite a surprise in light of the latest economic reports and market action.

I think I can explain why yesterday’s Beige Book was upbeat. The 12 Reserve Banks form their assessment of conditions in their region by going out and talking with business leaders in their respective areas. As I reported on May 29, the CEO Confidence Index jumped sharply in the 1Q of this year, from a weak reading of only 49 in the 4Q to 63 in the 1Q. 59% of business leaders predicted an improvement in the economy in the next six months versus only 32% in the 4Q.

The Fed Reserve Banks were surveying business leaders in April and early May when optimism was higher than in the last few weeks. I believe this explains why the latest Beige Book survey was more upbeat. If that same survey was taken today, I believe the results would be much more cautionary.”

The Fed begins each of its two-day FOMC meetings with a review of economic conditions since its last meeting, which was April 24-25. The latest Beige Book was released on June 6 and was definitely upbeat in its assessment of the economy. So the question for this week’s FOMC meeting is whether the Fed will rely on the June 6 Beige Book assessment, or will it rely more on subsequent economic reports which have been more negative on balance.

The answer to this question will, I suggest, determine if the Fed votes for more stimulus tomorrow, or not. The minutes from previous FOMC meetings this year suggest that Bernanke may not have enough support among the members of the Committee to push through another large round of stimulus, but that remains to be seen. We’ll know tomorrow afternoon.

Americans are Definitely Discouraged

A couple of polls released yesterday confirm that most Americans are discouraged about the economy. According to the latest Rasmussen poll, 62% of Americans feel the economy has slipped back into a recession at this point.

The Rasmussen Consumer Index, which measures consumer confidence on a daily basis, dropped three points on Sunday to 84.9. The index is down a point from a week ago, down two points from one month ago and down four points from three months ago.

The Rasmussen Investor Index fell two points on Sunday to 91.2, just above a five-month low last week. Investor confidence is down a point from a week ago, three points from a month ago and six points from three months ago. Among investors, 61% say the economy is in a recession and only 24% disagree.

In another Rasmussen poll, 52% of Americans believe the economy will be unchanged or weaker a year from now. Only 36% think the economy will be stronger in a year. Fewer than half think the economy will be stronger in five years.

In closing, keep in mind that the Supreme Court is scheduled to announce its ruling on ObamaCare next Monday, June 25. It will be interesting to see how the justices voted after all this time, and even more interesting to see how the markets react to the decision.

Blog Note: If you want to keep up with my latest thinking in these uncertain times, you need to read my weekly Blog. If you have not signed up to receive my weekly Blog, that means you’re missing key information that is not included with my weekly E-Letters that go out on Tuesdays. My Blog is free and I encourage you to sign up today.

FYI, we have recently added a new Wednesday blog. From now until the election, Spencer Wright and I will be giving you insights on the presidential race, complete with analysis on which key battleground states will decide the outcome. Our latest analysis will be out tomorrow afternoon.

To read my latest Blog, click here.

Wishing you a summer of fun,

Gary D. Halbert


Median family net worth fell nearly 40% 2007-2010

Euro crisis far from over

Panic sets in at the White House

Household net worth plunges to 1992 level

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