Posted tagged ‘Consumer spending’

Improving Household Net Worth and Cash Flow Bode Well for Spending

April 1, 2013

Improvements in the balance sheets and cash flow of households along with continued if not robust improvement in the labor market bode well for consumer spending  as the year progresses, helping the economy overcome the negative impacts of  payroll and other tax increases.

Home equity is a strong driver of the buying power and spending decisions of households.  Home prices are rebounding across the country and even New Hampshire is beginning to show some strengthening according to Core Logic’s Home Price Appreciation Index.  Appreciation in NH remains below a majority of states and well below the 15% suggested by the industry in the state.

January HPI

While home prices are still off from their 2006 peak, the rise in home prices has raised homeowners’ equity $1.6 trillion over the past year. This is the second largest nominal gain on record since 2005 when homeowners’ equity was up $2.0 trillion. In percentage terms, owners’ equity as a share of household real estate rose to 46.6% last year compared to 40.5% in 2011—the previous cyclical peak was 59.6% in 2005—and an all-time record low of 37.3% in 2009.

Private retirement and pension accounts represent a much smaller component of the net worth of households but they are key contributor to households’ sense of  financial “well-being” and a contributor to the “wealth effect” that impacts household confidence and their willingness to spend.

Private Pensions

The equity of homeowners is the largest contributor to the improvement in household net worth but the value of  the private pension accounts of households along with the rise in the value of the stock market are adding to consumer’s willingness to spend.  Lower interest rates, lower levels of debt, and improvements in wage and salary income are also improving the cash flow of households.  In combination, the outlook for consumer buying power and spending in 2013 looks like it could be stronger than the growth in the underlying economy would suggest.

Household Net Worth

Purchasing Power of Households Should Boost Consumer Spending

November 30, 2012

Households are arguably better positioned to increase their spending than at any time over the past decade. I define household purchasing power, in the aggregate,  as a combination of income and household financial obligations.  Household financial obligations include all debt obligations as well as things like housing rental costs, auto leases, insurance and property tax payments.   A combination of low interest rates that reduce the cost of debt for households as well as reductions in the use of credit and households paying down debt since the recession, have all combined to lower the financial obligations of households (in the aggregate) as a percentage of household disposable income.  Real wage and salary income is also increasing (even if not for all individual households).  In combination, the reduction in financial obligations and rising aggregate income should result in increasing consumer expenditures.  A  lack of conviction in the economic recovery, a decline in home values that affect consumer’s sense of financial well-being, and higher energy prices over the past year have all helped restrain consumer confidence and spending.  But energy prices are falling and home prices (in most areas) are rising.  As hiring (and thus wage and salary growth) accelerates, the stage is set for a long-awaited burst of consumer spending.

Consumer Health


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