Friday, June 06, 2008

Flow Of Funds & Budget Report

Last night, two key U.S. economic reports both widely ignored by most financial journalists were published.

The first report were the flow of funds report, which contained both bullish and bearish news, but mostly bearish. The one bullish item were the fact that household debt growth slowed considerably, to only 3.5% at an annual rate, the slowest in a very long time, and roughly in line with income growth.

However, because the value of household assets fell and household net worth fell even more, household leverage, i.e. their debt to asset ratio, rose to a record 20.6%, up from an upwardly revised 20.0% the previous quarter. Net worth now fell to its lowest in nominal terms since Q4 2006, and is of course even lower on a real basis and lower still on a real per capita basis. Since the bulls kept telling us that increased debt and non existent savings didn't matter because of capital gains from rising asset values, this, then the current low level of savings should be considered unsustainable even for them, assuming they are consistent (which is perhaps a too optimistic assumption).

Meanwhile, although the rate of growth in business debt slowed too, it remained quite high at an annual rate of 9.5%(The growth rate table says only 9.2%, but if you look at the actual level numbers it grew 2.3% from the previous quarter, which is 9.5% at an annual rate as 1.023^4 is 1.095 and not 1.092. Someone ought to teach these guys the principle of compound growth). Meanwhile, the growth of government debt accelerated further, to 9.9% for federal debt. The so-called rebate checks are likely to mean a sharp acceleration of government debt during the second quarter, although it might mean that household debt growth will fall further. This way, the federal government is so to speak socializing private debt.

The report also indicated that the gross savings rate fell to a new post-Depression low of 12.1% of GDP, while net savings fell to only 0.04% of GDP-also the lowest since the Great depression, except for the brief negative number following the massive capital destruction inflicted by hurricane Katrina in Q3 2005.

Meanwhile, the latest report from the Congressional Budget Office indicate that the U.S. budget deficit rose sharply in May compared to the year before. In May 2008, the budget deficit was $165 billion, up from $68 billion in May 2007. Much of this increase can of course be attributed to the sending out of the so-called rebate checks, which totaled $48 billion in May. The CBO also says that some of the remaining $49 billion increase can be attributed to calendar effects, but even excluding both the rebate checks and calendar effects, a significant increase in the budget deficit was seen.

Real federal revenues are now falling, while spending growth remain as high as ever, meaning that the budget deficit is likely to continue increase even after they stop sending out rebate checks.


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