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Posts tagged with: "DPI"

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Is household wealth overvalued?

Fluctuations in household net worth relative to income

When economists look at household wealth, they’re often concerned about the individual assets that make up that wealth—specifically, that they may be overvalued. Thankfully, FRED has an indicator to help us evaluate household wealth: The ratio of household net worth to disposable personal income. This ratio remained nearly constant for 50 years before the dot-com bubble (roughly 1994-2000), when it started increasing. And an increasing ratio may signal that the assets underlying net worth are overvalued. Since 2017, household net worth relative to income (dashed blue line) generally has been above its previous record level from the year before the Great Recession.

We also include the value of financial assets, a component of net worth, relative to income (solid green line). Most variations in net worth relative to income are associated with changes in the value of financial assets, which is indicated by the way the two lines track closely together in the graph. Even when housing values were collapsing and net worth fell (from $6.64 billion to $5.25 billion, or 1.4 times disposable income), the decline in the value of financial assets was 50% of that decline in net worth (from $5.07 billion to $4.37 billion). In terms of the recovery of net worth relative to income, which didn’t start until late 2012, we see again that the majority (65%) is accounted for by the rise in the value of financial assets.

How this graph was created: Search for “Household net worth” and select  “Households and nonprofit organizations; net worth, Level.” From the “Edit Graph” panel, use the “Customize Data” option to search for “Disposable Personal Income” and select the quarterly series in billions of dollars. After adding this series, enter “a/b” in the “Formula” box. This will show the ratio of household net worth to disposable income. To add the second line, use the “Add Line” option to search for and add the series “Households and nonprofit organizations; total financial assets, Level.” Then repeat the same process of dividing by disposable personal income.

Suggested by Ryan Mather and Juan Sánchez.

View on FRED, series used in this post: DPI, TFAABSHNO, TNWBSHNO

On household debt

Some people are worried about high levels of U.S. household debt. When looking at aggregate numbers, there are two ways to consider this question. The first is how much it costs to service this debt as a fraction of disposable (after tax) income. This is shown with the blue line. The second is how much debt there is with respect to the same disposable income measure. This is shown with the red line. Whether these numbers are high is difficult to say; household-level data are more appropriate for that question. But in the aggregate, both measures have clearly decreased during the past crisis. Note the scale, though: While service payments decreased by almost one-third, the debt ratio decreased by only one-fifth. And whenever interest rates go back up, service payments will increase.

How this graph was created: Creating the blue line is easy: Search for “household debt” and select the series for debt service as percent of disposable personal income. The red line is more complex because it has to be constructed: We need the two components of household debt (consumer credit and mortgages) as well as nominal disposable income—nominal, not the real or per capita versions, because the debt measures are in nominal terms. So, from within the graph, search for “household consumer debt” and add this series (a) to the graph. We must combine more data here, so add “household mortgage debt” (b) and “disposable income” (c), being sure to select “modify series 2.” Then create your own data transformation by applying the formula (a+b)/c. Finally, switch the y-axis position to the right.

Suggested by Christian Zimmermann

View on FRED, series used in this post: DPI, HCCSDODNS, HHMSDODNS, TDSP

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