The Wealth Effect Restoration
Part of the story of improving U.S. growth later this year and next is the restoration of household net worth to, or above, its’ pre-recession high. While markets are uncertain about what data will be the tipping point for the start of QE tapering, asset refl ation has been one of the goals of the Fed’s ultra-accommodative monetary policy, which until very recently had kept real yields across much of the Treasury curve in negative territory. Indeed, real yields on 10-year Treasuries had been negative for 18 consecutive months until fi nally turning positive about a week ago.
Those negative real yields were intended to encourage investor capital to fl ow into risk assets and subsequently drive up asset prices, which for the most part they have. Admittedly, the forces of asset refl ation have been somewhat uneven across asset classes (with commodities no longer participating in refl ation and single family home prices a late arrival to the refl ation party) and across American households. But, in aggregate, the wealth effect is back, even after taking into account that it is not adjusted for population growth. Not that the restoration of the wealth effect is a key policy benchmark for the Fed -- unlike, say, a 6.5% unemployment rate – but is,nevertheless, something that the Fed almost certainly views as a favorable development.Stocks and houses: The trajectory of the decline and recovery in household net worth can be seen in Exhibit 1. After a sharp loss of some US $15 trillion over the course of six calendar quarters, household wealth has recovered over the 16 quarters since its trough in March 2009. However, as can be seen, the recovery has not been linear.Indeed,there has been a recent J-curve effect as a strong stock market recovery has been joined by single family homes finally gaining some pricing traction.
As a result, 2012 was the strongest year, thus far, in household wealth recovery, with a gain of over US $6 trillion recorded last year. Of that, US $2 trillion came from mutual funds and corporate stock holdings. An additional US $800 billion came from pension fund assets (both defi ned benefi t and defi ned contribution). And, after several consecutive years of decline, single family homes fi nally made a positive contribution to the asset side of household balance sheets, adding US $1.5 trillion to the wealth effect last year.
Part of the story of improving U.S. growth later this year and next is the restoration of household net worth to, or above, its’ pre-recession high. While markets are uncertain about what data will be the tipping point for the start of QE tapering, asset refl ation has been one of the goals of the Fed’s ultra-accommodative monetary policy, which until very recently had kept real yields across much of the Treasury curve in negative territory. Indeed, real yields on 10-year Treasuries had been negative for 18 consecutive months until fi nally turning positive about a week ago.
Those negative real yields were intended to encourage investor capital to fl ow into risk assets and subsequently drive up asset prices, which for the most part they have. Admittedly, the forces of asset refl ation have been somewhat uneven across asset classes (with commodities no longer participating in refl ation and single family home prices a late arrival to the refl ation party) and across American households. But, in aggregate, the wealth effect is back, even after taking into account that it is not adjusted for population growth. Not that the restoration of the wealth effect is a key policy benchmark for the Fed -- unlike, say, a 6.5% unemployment rate – but is,nevertheless, something that the Fed almost certainly views as a favorable development.Stocks and houses: The trajectory of the decline and recovery in household net worth can be seen in Exhibit 1. After a sharp loss of some US $15 trillion over the course of six calendar quarters, household wealth has recovered over the 16 quarters since its trough in March 2009. However, as can be seen, the recovery has not been linear.Indeed,there has been a recent J-curve effect as a strong stock market recovery has been joined by single family homes finally gaining some pricing traction.
As a result, 2012 was the strongest year, thus far, in household wealth recovery, with a gain of over US $6 trillion recorded last year. Of that, US $2 trillion came from mutual funds and corporate stock holdings. An additional US $800 billion came from pension fund assets (both defi ned benefi t and defi ned contribution). And, after several consecutive years of decline, single family homes fi nally made a positive contribution to the asset side of household balance sheets, adding US $1.5 trillion to the wealth effect last year.
No comments:
Post a Comment