Households Run Record Deficit In Q1

By: Paul Kasriel | Sun, May 1, 2005
Print Email

Thank goodness for household borrowing and spending. Bless them, they spent $322.0 billion more, at an annual rate, than they earned in the first quarter. As shown in the chart below, this was a post-WWII record household deficit in dollar terms. If households, in the aggregate, are incurring a deficit, it implies they are making up the difference by either borrowing from other sectors, the foreign and/or domestic business sectors, or selling assets to other sectors. Of course, we know it is predominantly the foreign sector, in particular, the foreign central bank sector, that is enabling households to keep running these record deficits. But let's not cast aspersions on households for their borrowing and spending. This is exactly what the low interest rates are encouraging them to do. The Fed has held short-term interest rates below the consumer inflation rate, thus assuring households a negative inflation-adjusted return on money market accounts before taxes. After taxes, the return is even more negative. Home prices nationally rose, conservatively, by 11% last year while a one-year adjustable rate mortgage can be obtained at about 4-1/4%. Who needs hedge funds when an individual can buy an asset that is appreciating annually 675 basis points above its cost of financing. And the after-tax return is even better on this particular type of asset. No, so long as the Fed keeps interest rates low relative to inflation households will continue to borrow and spend. But watch out below when interest rates finally rise above inflation.

 


 

Paul Kasriel

Author: Paul Kasriel

Paul L. Kasriel
Director of Economic Research
The Northern Trust Company
Economic Research Department
Positive Economic Commentary
"The economics of what is, rather than what you might like it to be."
50 South LaSalle Street, Chicago, Illinois 60675

Paul Kasriel

Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005. The accuracy of Paul's 2008 economic forecast was ranked in the top five of The Wall Street Journal survey panel of economists. In January 2009, The Wall Street Journal and Forbes cited Paul as one of the few who identified early on the formation of the housing bubble and foresaw the economic and financial market havoc that would ensue after the bubble inevitably burst. Through written commentaries containing his straightforward and often nonconsensus analysis of economic and financial market issues, Paul has developed a loyal following in the financial community. The Northern's economic website was listed as one of the top ten most interesting by The Wall Street Journal. Paul is the co-author of a book entitled Seven Indicators That Move Markets.

Paul began his career as a research economist at the Federal Reserve Bank of Chicago. He has taught courses in finance at the DePaul University Kellstadt Graduate School of Business and at the Northwestern University Kellogg Graduate School of Management. Paul serves on the Economic Advisory Committee of the American Bankers Association.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The information herein is based on sources which The Northern Trust Company believes to be reliable, but we cannot warrant its accuracy or completeness. Such information is subject to change and is not intended to influence your investment decisions.

Copyright © 2005-2012 The Northern Trust Company

All Images, XHTML Renderings, and Source Code Copyright © Safehaven.com