A lot of important news about the U.S. economy has been released during the latest 24 hours. Including last night's flow of funds report, the trade balance report and the employment report.
Starting with the flow of funds report
. It was actually somewhat more bullish than I had anticipated. While household debt again rose to a new all time high, to 131,8% of disposable income up from 130,4% the previous quarter
, it was still a lot slower increase than expected given the much sharper increase in bank lending. Presumably, this apparent statistical discrepancy is a result of a significant slowdown in non-bank lending.
Another bearish number was a continuing decline in owner's equity in homes, which fell to a new all-time low of 53,1%. Yet another bearish indicator was the corporate financing gap (the amount of money corporations need to raise from outside sources) which rose to an annual rate of $70,5 billion, up from $48,3 billion in the third quarter. For all of 2006, the gap was $47,1 billion, compared to a surplus of $138,3 billion in 2005.
One bullish number was the significant increase in household net worth
, which occurred despite higher levels of debt and the slower house price increases. Indeed, asset values and therefore net worth increased faster than debt for the first time for quite some time, lowering the debt to net worth ratio. This was the result of the stock market rally last year, which is illustrated by the fact that mutual fund shares and pension fund reserves were the assets that increased the most. This bullish trend is however unlikely to continue in the first quarter of 2007 as stock prices have been stagnant.
Turning now to the trade deficit number, it came in roughly as expected at $59,1 billion
. Contrary to Gregg Robb of marketwatch
, however, it won't add to first quarter GDP, as the deficit was somewhat higher than in October 2006, both in absolute number and in the "2000 Chain-Weighted Dollars" used for calculating real GDP growth.
The employment report was seemingly bullish at first glance. For some reason, "professional analysts" are obsessed with the non-farm payroll number, even though it is actually one of the less relevant. And as the non-farm payroll number came in line with expectations and as the unemployment rate fell and average hourly earnings increased a full 0,4%, the number was interpreted as a vindication of the bulls
However, the small increase in non-farm payrolls masks a unusually large decline in the more interesting number of hours worked, which fell 0,3%. And the decline in the unemployment rate was a result of a significant decline in the labor force participation rate. Employment actually fell according to the household survey and is lower than two months ago.
The increase in average hourly earnings will likely be cancelled out by an even bigger increase in consumer prices as energy prices have recovered from the January lows and both food prices and "core" prices rise rapidly.
So, contrary to the Wall Street interpretation, the employment report was bearish as hours worked and probably also real wages fell, supporting the stagflation scenario I've predicted for some time. Also supporting this is the fact that commodity prices have started to rise again
after a brief correction, while rising level of defaults of sub-prime mortgages
is likely to put further pressure on the housing market.