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Last updated: June 24, 2009 11:27 pm
Want to to know why US house prices are still tumbling and shops are vanishing from main street? Check out the first-quarter flow of funds data from the Federal Reserve. Household funds were still pouring into real estate as recently as the third quarter of 2007. After that, when house prices really began to tank, net expenditure on housing drained out at a quarterly rate of between 4 and 8 per cent. During the first quarter of 2008, it dropped 13 per cent.
The data also show that Americans are finally waking up to the reality of saving. In spite of the recession kicking off more than 18 months ago, household financial flows only turned positive in the fourth quarter. Aggregate financial savings jumped from $90bn to $320bn this quarter, however, the biggest number in decades.
Even so, that rate of savings is equivalent to only 2.3 per cent of gross domestic product, having been almost twice that level during the 1990s recession and more than 6 per cent in the early 1980s. That is bad news for consumption, especially as the move to a savings culture is happening so late. In the first quarter, the ratio of gross household debt to disposable incomes fell only 2 percentage points to a still whopping 127 per cent. At the current rate of saving – and assuming no change to incomes – it would still take 14 years to shrink the debt ratio to its average of 88 per cent since 1974.
That would be a long, nasty grind, increasing savings overall by a massive one-third of GDP. But it is just as likely that suffering consumers will start saving with even more verve. While that may be good for household balance sheets, it paints a grim scenario for the broader economy.
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