ABA Banking Journal - February 2009 - (Page 44)
briefing The Economy SCOTT ANDERSON Senior Economist, Wells Fargo, and a member of the ABA Economic Advisory Committee Stimulus package could fall short of the mark THERE IS A LOT OF WHAT CAN only be described as “hope” surrounding the economic stimulus package that the Obama Administration is touting as the American Recovery and Reinvestment plan. The sheer numbers that are being bandied about are shocking—even mind boggling. Surely, a $775 billion dollar spending and tax cut package will put our economy back on track? The package alone is nearly equivalent to one full year of normal federal discretionary spending. Indeed, we too are anticipating that the most likely outcome is a return to at least some modest GDP growth in the second half of 2009. Yet it is important to balance this enthusiasm for the additional federal spending to come with the sheer size of what has already been lost. We read headlines all the time about how much wealth has been destroyed by the decline in home and stock values. Estimates vary, but it is always a number followed by the word trillions. But I don’t think many people can truly grasp the magnitude of the wealth destruction that has transpired in only a little over a year’s time. So here goes my attempt to do just that. It might even shock you back into reality. Granted this analysis is simply backof-the envelope and includes some fairly restrictive assumptions, but I think it’s effective in getting my point across. Based on the Federal Reserve flow of funds data through the third quarter of 2008, household real estate wealth declined by $2.5 trillion and household stock market wealth declined by a similar $2.7 trillion from their peaks, for a grand total decline in household wealth of about $5.3 trillion. With November’s private savings rate of 2.8% and the latest level of disposable income of approximately $10.7 trillion, how long would it take for U.S. households to replace this lost wealth with savings, assuming no future home think. Here comes the answer in all its gory details….17.6 years! This could actually be a conservative estimate of the time it could take to rebuild the lost wealth, since stock market and housing price declines accelerated further in the fourth quarter. What can we conclude from this analysis? Barring a swift reversal in asset prices, something that is unlikely $ Billions $0 -$1,000 -$2,000 -$3,000 -$4,000 -$5,000 Household wealth destruction Decline from peak to Q3 ’08 Real Estate Stocks Total -$2,515 -$2,744 -$5,259 -$6,000 Source: Federal Reserve, Wells Fargo Economics or stock price appreciation or rate of return on our savings? One might argue strenuously about these assumptions, but I don’t know any analysts who are predicting significant home price gains over the next few years, and the current risk-free rate of return on cash is about as close to zero as it comes, so these assumptions might not be as far off the mark as you might given the need to deleverage and build savings, the mighty U.S. consumer’s spending power isn’t what it used to be, and isn’t likely to return with vigor anytime soon. You can shoot or ignore the messenger, if you want, but it still doesn’t change the fact that we are in for a prolonged period of tough economic times with or without a whopper of a fiscal stimulus package. BJ 44 FEBRUARY 2009/ABA BANKING JOURNAL Subscribe at www.ababj.com
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