Two weeks ago we calculated that based on the recent collapse in stock prices, US households have lost at least $20 trillion in net worth simply because financial assets (unlike tangible assets such as real estate) represent the vast majority of the US household balance sheet (at least that of the top 10%; the bottom 50% have virtually no assets but lots of liabilities, i.e., debt).
Today, the Fed released its quarterly Financial Accounts (also known as Flow of Funds or Z.1) statement which, among other things, gives the official estimation of household net worth for the US (along with fund flows and stock levels for all aspects of the US economy). The only problem is that as of March 31, said "calculation" was laughable, with the Fed - which clearly has gotten its pig lipsticking marching orders from the Biden admin - reporting that in the first quarter, in which stocks basically crashed into a bear market, wiping out tens of trillions in market cap, household net worth decreased by only $0.5 trillion in the first quarter, fueled by a $3 trillion drop in stock values (and offset by a $1.7 trillion increase in real estate, the same increase which the Fed is scrambling to destroy by sending mortgage rates into orbit), or visually:
This is laughable because as we noted at the end of May, just the net worth of the world’s 500 richest people had by dropped $1.6 trillion since its peak in November, as calculated by Bloomberg, with US Billionaires losing $800 billion, or more than the entire US supposedly lost in net worth in the entire first quarter.
Why would the Fed embellish yet another number? Perhaps because the Biden admin, already pounded daily on all sides by attacks its senile incompetence has sparked the worst stagflationary economic crash in 40 years, did not want to also be accused of wiping out tens of trillions in net worth. Well, the Fed may have kicked the can, but it won't be able to do it for much longer: as the next chart shows, unless stocks make some remarkable recovery in the next 3 weeks, the Q2 net worth crash will be the biggest ever, and this time not even the Fed can do anything to make it less painful.
Laughable of not, let's dig into the the numbers, if only for the sake of continuity, straight from he Fed:
- The net worth of households and nonprofit organizations declined $0.5 trillion to $149.3 trillion in the first quarter. A sizeable $3 trillion decline in the value of stocks on the household balance sheet was partially offset by an increase in the value of real estate ($1.6 trillion) and a continued high rate of personal saving. The ratio of household net worth to disposable income was about equal to the record high of 8.2 posted last quarter and remains well above the level seen just before the pandemic in 2019.
- Directly and indirectly held corporate equities ($46.3 trillion) and household real estate ($39.7 trillion) were among the largest components of household net worth. Household debt (seasonally adjusted) was $18.3 trillion.
- Household Balance Sheet Summary
- Nonfinancial debt: Household debt grew by 8.3% in the first quarter of 2022 (this and subsequent rates of growth are reported at a seasonally adjusted annual rate), a bit higher than in the previous quarter. Home mortgages increased by 8.6% amid surging home prices, and nonmortgage consumer credit increased by 8.7%, buoyed by rapid growth in credit card borrowing and auto loans.
- Nonfinancial business debt grew at a rate of 8.0%, reflecting strong growth in loans, both from depository institutions and from nondepository institutions, and modest net issuance of corporate bonds. Federal debt increased by 14.9%. State and local debt decreased by 3.0%. Looking at the various components of nonfinancial business debt, nonmortgage depository loans to nonfinancial business increased by $79 billion in the first quarter. Loans from nondepository institutions also increased, as did commercial mortgages and corporate bonds outstanding. Overall, outstanding nonfinancial corporate debt was $12.2 trillion. Corporate bonds, at roughly $6.7 trillion, accounted for 55% of the total. Nonmortgage depository loans were about $1.2 trillion. Other types of debt include loans from nonbank institutions, loans from the federal government, and commercial paper.
As we said above, none of the above matters due to the clear massaging of the headline data meant to represent the economy as stronger than it is.
However, while we know that US households were much poorer than the Fed tried to represent as of March 31, what is far more ominous is what today's Flow of Funds report implied for future stock prices.
As Bloomberg's Ye Xie shows in the next chart, which as as noted previously shows a strong correlation between investor allocation to stocks over debt and the subsequent equity returns, a dismal decade is facing stocks simply because higher equity valuation has tended to lead to lower future returns.
As Xie notes, the black line above shows the annualized stock return that investors earned over the subsequent 10 years. In 1999, the line fell to about minus 5%. That means investors lost 5% a year over the following decade. Meanwhile, the (inverted) yellow line tracks the value of U.S. equities divided by the combined value of stocks and debt -- suggesting whether stocks are cheap or expensive (more here).
So where are we now? the current reading of the stock/bond valuation ratio is at the similar level of the peak of the dot.com bubble at the turn of the century. It points to sub-zero returns for the next 10 years!
Xie's conclusion: "brace for a lost decade."
The New York Fed DSGE Model Forecast— September 2023
This post presents an update of the economic forecasts generated by the Federal Reserve Bank of New York’s dynamic stochastic general equilibrium (DSGE)…
This post presents an update of the economic forecasts generated by the Federal Reserve Bank of New York’s dynamic stochastic general equilibrium (DSGE) model. We describe very briefly our forecast and its change since June 2023. As usual, we wish to remind our readers that the DSGE model forecast is not an official New York Fed forecast, but only an input to the Research staff’s overall forecasting process. For more information about the model and variables discussed here, see our DSGE model Q & A.
The New York Fed model forecasts use data released through 2023:Q2, augmented for 2023:Q3 with the median forecasts for real GDP growth and core PCE inflation from the Survey of Professional Forecasters (SPF), as well as the yields on ten-year Treasury securities and Baa-rated corporate bonds based on 2023:Q3 averages up to August 30. Moreover, starting in 2021:Q4, the expected federal funds rate between one and six quarters into the future is restricted to equal the corresponding median point forecast from the latest available Survey of Primary Dealers (SPD) in the corresponding quarter. The current projection can be found here.
The change in the forecast relative to June reflects the fact that the economy remains resilient in spite of the increasingly restrictive stance of monetary policy. Output growth is projected to be almost 1 percentage point higher in 2023 than forecasted in June (1.9 versus 1.0 percent) and somewhat higher than June for the rest of the forecast horizon (1.1, 0.7, and 1.2 percent in 2024, 2025, and 2026, versus 0.7, 0.4, and 0.9 in June, respectively). The probability of a not-so-soft recession, as defined by four-quarter GDP growth dipping below -1 percent by the end of 2023, has become negligible at 4.6 percent, down from 26 percent in June. According to the model, much of the resilience in the economy so far stems from the surprising strength in the financial sector, which counteracts the effects of the tightening in monetary policy. Inflation projections are close to what they were in June: 3.7 percent for 2023 (unchanged from the previous forecast), 2.2 percent for 2024 (down from 2.5 percent), and 2.0 percent for both 2025 and 2026 (down from 2.2 and 2.1 percent, respectively). The model still sees inflation returning close to the FOMC’s longer-run goal by the end of next year.
The output gap is projected to be somewhat higher over the forecast horizon than it was in June, consistent with the fact that the surprising strength of the economy is mainly driven by demand factors such as financial shocks, as opposed to supply factors. As in the June forecast, the gap gradually declines from its current positive value to a slightly negative value by 2025. The real natural rate of interest is estimated at 2.5 percent for 2023 (up from 2.2 percent in June), declining to 2.2 percent in 2024, 1.9 percent in 2025, and 1.6 percent in 2026.
|Date of Forecast||Sep 23||Jun 23||Sep 24||Jun 24||Sep 25||Jun 25||Sep 26||Jun 26|
|Core PCE inflation|
|Real natural rate of interest|
Notes: This table lists the forecasts of output growth, core PCE inflation, and the real natural rate of interest from the September 2023 and June 2023 forecasts. The numbers outside parentheses are the mean forecasts, and the numbers in parentheses are the 68 percent bands.
Forecasts of Output Growth
Forecasts of Inflation
Real Natural Rate of Interest
Marco Del Negro is an economic research advisor in Macroeconomic and Monetary Studies in the Federal Reserve Bank of New York’s Research and Statistics Group.
Pranay Gundam is a research analyst in the Federal Reserve Bank of New York’s Research and Statistics Group.
Donggyu Lee is a research economist in Macroeconomic and Monetary Studies in the Federal Reserve Bank of New York’s Research and Statistics Group.
Ramya Nallamotu is a research analyst in the Federal Reserve Bank of New York’s Research and Statistics Group.
Brian Pacula is a research analyst in the Federal Reserve Bank of New York’s Research and Statistics Group.
How to cite this post:
Marco Del Negro, Pranay Gundam, Donggyu Lee, Ramya Nallamotu, and Brian Pacula, “The New York Fed DSGE Model Forecast— September 2023,” Federal Reserve Bank of New York Liberty Street Economics, September 22, 2023, https://libertystreeteconomics.newyorkfed.org/2023/09/the-new-york-fed-dsge-model-forecast-september-2023/.
The views expressed in this post are those of the author(s) and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author(s).
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Canadian dollar edges higher as retail sales rebound
Canada retail sales climb 2% The Canadian dollar has posted losses on Friday. In the European session, USD/CAD is trading at 1.3446, down 0.28%. Canada’s…
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The Canadian dollar has posted losses on Friday. In the European session, USD/CAD is trading at 1.3446, down 0.28%.
Canada’s retail sales jump
Canada’s retail sales rebounded in impressive fashion on Friday. Retail sales in July jumped 2% y/y, following a -0.6% reading in June and beating the 0.5% consensus estimate. On a monthly basis, retail sales rose 0.3%, up from 0.1% in June but shy of the consensus estimate of 0.4%. The good news was tempered by the August estimate, which stands at -0.3% m/m and would be the first decline since March. The Canadian dollar showed little reaction to the retail sales release.
The Bank of Canada doesn’t meet again until October 25th and policy makers will have plenty of data to monitor in the meantime. The BoC has been walking a tightrope that will be familiar to most central banks, that of trying to balance the risks of over and under-tightening. The difficulty in finding the right balance was highlighted in the BoC summary of deliberations of the policy meeting earlier this month.
The BoC decided to hold the benchmark rate at 5.0% after concluding that earlier rate hikes were having an effect and slowing economic growth. The summary indicated that policy makers were concerned that a pause might send the wrong message that rate cuts might be on the way. With inflation still above the BOC’s target, the central bank is not looking at rate cuts and stressed at the September meeting that rate hikes were still on the table and that inflation remained too high.
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- 1.3408 and 1.3323 are the next support lines
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