About Flow Of Funds Report
The report did not produce any mayor surprises. The numbers were roughly what I had expected, in that debt growth had indeed slowed dramatically particularly for households, and that net worth had shrinked as did savings. To elaborate on the specifics:
-The one really bullish detail of the report was the sharp deceleration in household debt growth. Household debt grew just 1.4% at an annual rate in nominal terms, which was less than the rate of inflation or nominal income growth (even excluding the effects of the temporary tax rebates), meaning that for the first time in decades, American households are finally reducing their relative debt burden.
-However, this reduction comes in the context of first of all the temporary fiscal stimulus in the form of the so-called tax rebate, which enabled many to spend with the money they got from the government rather than money they borrow. And secondly this came in the context where the value of both houses and financial assets decline. As a result, even nominal net worth fell during the second quarter, and given the inflation rate of more than 4%, the real decline was of course larger.
Note moreover that this modest decline was derived using the OFHEO house price index. While the Case-Schiller index clearly exaggerate the house price decline by excluding the less volatile rural areas, the OFHEO index likely underestimate the decline as it exludes the most volatile forms of loans.
And while the household debt burden finally fell, corporate debt (and government debt) continued to increase faster than national income.
-Another interesting note was how net savings fell to yet another post-Depression low, minus more than 1% in the income accounts, down from roughly zero the previous quarter. As I pointed out before, there is a "statistical discrepenacy" between income based data (national income) and production based data (GDP), and as the production data give a more positive picture of income it also gives a more positive picture of savings. But while the production based levels were more positive, the change was the same as porductiin based national savings for the first time fell below zero after having previously had a large surplus.