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.
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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.
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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.
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