Originally posted at Briefing.com.
Fed Chair Janet Yellen recently said that the Federal Reserve is "generally pleased" with the US economy. She did so at the same time she was noting for listeners that the Fed's median projection for the change in real GDP for both 2016 and the longer run had been lowered to 1.8% from 2.0%.
It was lip service at its finest; meanwhile, the updated projections were starkly modest when taking into account some large gains in median household income and household net worth recently reported by the US Census Bureau and the Federal Reserve.
You may also like Forward-Looking Data Show Growing Risks of Recession
If one took those gains at face value, one might think the US economy is booming. It isn't, though, because consumers have been more reserved with their spending and because the Fed's monetary policy, which rests on the wealth effect, isn't a one-for-all policy.
Hindsight Not Exactly 20-20
A few weeks ago, the US Census Bureau said median household income in the United States increased 5.2% in real terms in 2015 to $56,516. That was the first annual increase in median household income since 2007, but notably, it was still 1.6% lower than in 2007.
With the updated data point in hand, the interesting aspect in hindsight is that real personal consumption expenditures increased just 3.2% in 2015 while real GDP increased only 2.6%.
All of the income that was gained, therefore, wasn't spent.
Read Zatlin: Expect Layoffs Come January as US Nears Inflection Point
That's certainly prudent from a financial planning standpoint, but as we have written in the past, the propensity to save one's income—earned or unearned—acts as a headwind on the US economy, which thrives on personal spending.
The lesson of the financial crisis for many was to be better prepared for the next crisis. Hence, personal saving as a percentage of disposable personal income, which was 2.9% in 2007, got bumped up to 5.8% in 2015.
Credit and Blame Where They Are Due
Prior to its most recent Federal Open Market Committee meeting, the Federal Reserve reported that household net worth hit a record .1 trillion in the second quarter.
That' a stunning figure and it has been helped along greatly by the rise in stock prices and home values.
Related Household Net Worth: The “Real” Story
Just before the last stock market peak in October 2007, household net worth in the third quarter of 2007 stood at .7 trillion. It would eventually plummet to .4 trillion in the first quarter of 2009, so it is plain to see a whole lot of ground has been made up in the interim.
The Fed certainly deserves some credit for that. Where the blame remains, however, is in a clear understanding that the wealth effect has not resuscitated the US economy in the fashion that was envisioned by Ben Bernanke and his colleagues.
We're not surprised at all by that understanding. We penned a piece in this column in February 2013*, which was critical of the Fed's intention to target asset prices with its monetary policy.
Our perspective at the time was rooted in the belief that the policy wouldn't hit the mark of achieving escape velocity for the economy because it wasn't enhancing household net worth in a balanced way.
To that end, research at the time showed only 47% of all US households owned stock, and of the households that did own stock, only 31% had stock holdings of ,000 or more. Furthermore, the homeownership rate at the time was 65% (it has since fallen to 62.9%), meaning roughly 35% of households wouldn't benefit from any appreciation in home values.
What It All Means
It is good to see median household income going up and household net worth going up. Those trends are loaded with potential for the US economy, but only if the added income and wealth translates into added spending that drives increased velocity in the exchange of money.
When money starts turning over because consumers have unbridled confidence in their income growth prospects, and investors aren't living in fear of a potential stock market sell-off that might greatly diminish their net worth, then it becomes reasonable to expect higher growth rates for the US economy.
The Federal Reserve might be "generally pleased" with how things are going for the economy, yet that general view looks relative in relation to a generally depressed base of expectations.
It bears mentioning that when the Federal Reserve introduced its economic projections in April 2011, the central tendency projection for longer run real GDP growth was 2.5% to 2.8%. Today, it is 1.7% to 2.0%—and that's after a whole lot more policy accommodation, job creation, median income gains, and wealth accumulation in the interim.
Clearly, monetary policy has helped some, yet something is still amiss in the transmission of monetary policy to the real economy. It is difficult to pinpoint what that something is precisely.
See Michael Lewitt: We're in the Late Stages of Ponzi Finance
It isn't one thing, but likely a compilation of factors, including a lack of fiscal support and a lack of confidence in the outlook.
After all, how confident can a consumer be in the outlook when the Federal Reserve and other major central banks feel compelled this long after the financial crisis to keep pressing the pedal on monetary policy accommodation and keep promising that they stand ready to do more?
The Federal Reserve's latest projections show a median estimate for the change in real GDP of just 1.8% for the longer run
From our vantage point, that's not generally pleasing. Rather, it's a general admission that animal spirits in the economy are still lacking despite a rebound in median household income and record levels of household net worth.
Ironically, the Federal Reserve's policy of holding rates near the zero bound is helping to keep those spirits caged because it raises concerns about the outlook for consumers, who feel the need to save more of their income to meet any challenges ahead, and concerns for investors who fear a prolonged period of near zero interest rates will invite a repeat of a nasty bear market.
