The Federal Reserve released its third quarter Flow of Funds report, which includes measures of debt accumulation and household sector wealth. This data is fundamental to the applied New Classical macroeconomist as wealth is believed to be a key driver of consumption.
United States households continued to rebuild their balance sheets during the third quarter. Overall household debt contracted at a seasonally adjusted annual rate of 1.75 percent, which was the tenth consecutive quarterly decline. This was driven by a 2.5 percent reduction in mortgage debt and a 1.5 percent reduction in consumer credit.
Household sector net wealth rose a bit, $1.2 trillion, from last quarter, a 2.2 percent quarterly non-seasonally adjusted increase. This increase was not enough to offset losses in net wealth that occurred during the second quarter. The third quarter increase was driven mostly by increases in the value of equity holdings. Deposit value rose a little and bond value fell some. The value of tangible assets fell, driven by a decrease in the value of real estate assets.
The rise in net household wealth is nice, but the level of wealth, now at $54.9 trillion, is still way down from earlier years. Theoretically, household consumption expenditures should not have been particularly strong in the third quarter, but they surprised us with a 2.8 percent growth rate. Thankfully, the BEA measure of household savings rate remained relatively high at almost 6 percent, consistent with this press release indicating debt reduction. This is the important part of today’s data release. The process of debt decumulation by the household sector is necessary for long term economic health, but unfortunately is a slow and painful process.