Put away those worry beads

[Marvin Gandall <marvgandall@xxxxxxxxxx>]

(An article in the latest Business Week says despite fears about the
sputtering US economy and overindebtedness, consumers and businesses are
still sitting on lots of cash. US households have $5.5 trillion in the bank
and corporations $1.5 trillion – both up from last year. Net household worth
is at a record $45.9 trillion, most of it real estate, where the rise in
home values has outstripped the growth in mortgage debt. “For Corporate
America, the situation is much the same as for consumers: lots of cash and
manageable debt”, the magazine says. The problem, of course, is that the
wealth is greatly concentrated at the top. BW reports the wealthiest 10% of
households had a median net worth of $1.3 million, while the bottom 25% had
just $1,000. (!) Although the magazine says “worries about consumer debt
levels are overblown”, even a modest uptick in interest rates will make it
more difficult for tens of millions of lower-income Americans already
hard-pressed to service their mortgage and consumer debt, and asset values
could plunge.)

MG
---------------------------------
What's Everyone So Rattled About?
By James C. Cooper & Kathleen Madigan
Business Week
October 4 2004

Despite record wealth, business and consumers remain wary of the future

Money can't buy happiness. And it doesn't seem to buy confidence, either.
The latest data from the Federal Reserve show that U.S. households and
corporations have seen their net worth levels rise to record highs, and both
sectors are sitting on mountains of cash. Yet, uncertainty -- whether about
Iraq, the upcoming elections, or fuel costs -- is nipping at the economy's
heels. Consumers are worried about job security and the future of gas and
heating oil prices. Companies seem reluctant to commit to expansive hiring
plans. And early warnings about profits have rattled the stock market. Even
the weather is unsettled; hurricanes could skew the third-quarter data,
especially on payrolls.

(snip)

According to the Fed, households in the second quarter held a record $5.5
trillion in such near-cash assets as checking deposits and money-market
accounts. That's up $233 billion from a year ago. Corporate cash flow dipped
slightly from its record high of $1.3 trillion in the first quarter, but
it's up $122 billion over the past year.

For consumers, total net worth hit a new high of $45.9 trillion. True,
wealth is not evenly distributed among the population. According to the
latest available data for 2001, the wealthiest 10% of households had a
median net worth of $1.3 million, while the bottom 25% had just $1,000. Even
so, the imbalance does not alter the economic rule that 3 cents to 5 cents
of each dollar of sustained wealth will be spent, helping to boost overall
demand.

The big wealth gains in the second quarter came from corporate equities and
housing. Holdings of stocks and mutual funds were up $1.4 trillion over the
past year. However, it's interesting to note that equities as a share of
financial assets have slipped from 35% in early 2000 to 27% today. Most of
the wealth has shifted into liquid assets, as uncertain investors stay out
of the markets.

ONE AREA where consumers feel no jitters is housing. Americans still see
homeownership as one of the best investments around. Indeed, housing
equity -- total home values less mortgage outstanding -- rose an additional
$919 billion in the year ended in the second quarter.

Thanks in part to the recent fallback in mortgage rates, demand for homes
remains solid. Housing starts in August edged up 0.6% to an annual rate of 2
million. And the National Association of Realtors is forecasting another
record number of home sales for 2004.

(snip)

LOW INTEREST RATES also suggest that worries about consumer debt levels are
overblown. Total household liabilities rose 9.3% in the year ended in the
second quarter, with most of the jump coming in mortgage obligations.
However, the value of households' real estate holdings has risen more than
twice as fast as mortgage debt. Consumer credit, including credit-card and
other revolving balances, is up only 4%.

Households' overall financing burden has actually declined over the past
year. Since aftertax income is up about 6%, and since low rates over the
past year induced many homeowners to refinance their mortgages, the amount
of income needed to service household debt used up 13.1% of income in the
second quarter, down slightly from 13.24% a year ago.

For Corporate America, the situation is much the same as for consumers: lots
of cash and manageable debt. The Fed data show that the net worth of nonfarm
nonfinancial corporations rose almost $900 billion, to $10.4 trillion in the
second quarter. Although assets rose 6%, businesses did not add much to
their liabilities. But that trend may be changing. Commercial and industrial
loans began to turn up this summer. That may indicate companies are shedding
their caution. Another good sign is the rise in capital spending.

(snip)

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