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December 19, 2017 01:00 AM

Households, corporations cap off strong 2017

Bill Wood
Economics Editor
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    With my last column for 2017, it is appropriate to share some highlights from the Federal Reserve Board's quarterly Z.1 report.

    Z.1 is economists' shorthand for "Financial Accounts of the United States." The report contains a lot of data, but my favorite parts are the balance sheets for the U.S. economy.

    I intend to end the year on a high note, so I will skip any mention of data pertaining to the federal debt. That is enough to depress anybody. Rather, I will confine my analyses to the balance sheets of my two favorite segments of the U.S. economy: households and non-financial corporations.

    Household accounts

    In the third quarter, total U.S. household assets climbed to $112.4 trillion. This was a gain of $1.9 trillion from the previous quarter, and it was an increase of 7 percent from the same quarter a year ago.

    It should come as no surprise that the largest year-over-year increases (in percentage terms) came in the value of stocks and mutual funds, up 17 percent and 14 percent, respectively. The total value of housing registered a solid increase of 7 percent.

    Total household liabilities in the third quarter escalated to $15.4 trillion. This represented a rise of $200 billion from the previous quarter, and it was 3 percent higher when compared with last year.

    Some notable changes in liabilities were that consumer credit outstanding escalated by nearly 6 percent and home mortgages expanded by 3 percent over last year.

    Subtracting the liabilities from the assets results in a total net worth for U.S. households of $96.9 trillion in the third quarter. This was $1.7 trillion higher than it was in the second quarter this year, and it represented a robust gain of 8 percent when compared with the third quarter in 2016.

    My short-term takeaway is that many U.S. households are in excellent financial shape. Unless the stock market tanks before the end of the year, there will be another salubrious gain in household wealth in the fourth quarter. The recent trend in housing prices is also supportive of continued strong growth in total wealth. This will provide a substantial tailwind to consumer spending in 2018 due to a phenomenon that economists have dubbed the wealth effect.

    The U.S. economy is exceptional in its ability to generate wealth, and this will be a positive factor for the upward trend that I am forecasting in the spending data in 2018. However, the most important driver of consumer spending growth is not rising wealth, but rather rising wages and incomes.

    This brings me to my long-term takeaway from this data, which is that this economy needs to do better at wealth distribution. The gains in the wage data are not nearly as vigorous as in the wealth data. The latest figures indicate that wage growth is accelerating, but it has yet to achieve a sustained, year-over-year pace of 3 percent. Because of this sluggish wage growth, it took until last year for the median household income in the United States to get back to the level it was at in 2000.

    Many analysts and politicians argue that the trend of rising wealth disparity is the biggest problem currently confronting America, and I agree. Their solution to this problem is almost universally some type of federal or state government program of taxation and redistribution. Here is where I part company with them: I strongly disagree with proposed remedies that require large government programs or taxes.

    Nevertheless, we can and must do better, but it will require greater effort from many of us. I sense there is a holiday message and New Year's resolution for me in all of this.

    Bill Wood

    Non-financial corporate accounts

    In the third quarter, total non-financial corporate assets advanced to $43.1 trillion. This was a gain of $600 billion from the previous quarter, and it was a rise of 5 percent from the same quarter a year ago. The value of non-financial assets were up 4 percent when compared with a year ago. These include gains for real estate (up 4 percent), equipment (up 3 percent), intellectual property (up 5 percent) and inventories (up 4 percent).

    The value of financial assets (cash, treasuries, etc.) increased by 7 percent. It is worth noting that the pace of growth in the amount companies are holding in cash and other liquid assets has accelerated in recent years.

    Total liabilities for non-financial corporations in the third quarter increased to $19.5 trillion. This was a rise of $230 billion from the previous quarter, and it was 4 percent greater when compared with last year. The amount of debt and loans increased by 5 percent year over year.

    Subtracting the liabilities from the assets results in a total net worth for U.S. non-financial corporations of $23.6 trillion in the third quarter. This was $390 billion higher than it was in the second quarter this year, and it was a gain of more than 6 percent when compared with the third quarter in 2016.

    For the most part, American corporations are thriving. The data indicates there is plenty of cash available for future investment in new plants, equipment and employees — if that is what they wish to do with it. The proposed tax reform legislation combined with the repatriation of cash from overseas accounts will represent a substantial addition to these cash holdings.

    This begs the question, "What can be done to get companies to increase investment in equipment and people?" It appears that corporate leaders are increasingly content to hold cash with a return of less than 3 percent. I do not believe that government programs can counteract this reluctance to invest. This problem requires a market-based solution.

    So, wage growth is languishing below 3 percent, there is a growing preference for holding cash that is returning less than 3 percent, and the overall economy is stuck in a pattern of sub-3 percent growth. These interconnected trends may reflect the current state of our nation's economy, but I hope they are not the new reality for the future of America.

    I close my last column of 2017 with a wish and a cautionary quote:

    • Here's wishing you all a healthy, prosperous and generous New Year.

    • "Americans have always been able to handle austerity and even adversity. Prosperity is what is doing us in." — James Reston, American journalist.

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