Latest Z.1 data on US assets, liabilities and net worth

The Fed has released the latest data on US balance sheets by sector, for the 2nd quarter of 2009. The Z.1 dataset, as it is known, tracks the money values in every asset class for the US household sector, corporate business, unincorporated business, and government, and has since 1945.

The headline number is that US household net worth is up $2 trillion in the 2nd quarter compared to the 1st, which was its low for the cycle. The recovering stock market is the main driver. Household-owned real estate is up about $330 billion, and debt is down modestly. The net worth total is $53 trillion, marginally higher than the level at the end of 2004, but still well below the cycle peak of $64 trillion at the end of 2007.

The personal income line is back up to $10.9 trillion after taxes, about its mid 2008 level.

For corporate business, net worth was down $600 billion due to falling commercial real estate values (off $680 billion), with financial assets up $150 billion, debts up $60 billion, and everything else flat. The net worth there is $13.2 trillion. For non-corporate business the net worth was down about $250 billion to $5.4 trillion, with commercial real estate again accounting for the decline. Financial assets declined marginally to retire debt.

These should not be double-counted, the household line contains the other two. I provide the detail on the corporate and non-corporate business breakdown because it is always of independent interest for economic trends.

Also of some interest may be the total credit outstanding line item, which stands at $52.8 trillion, down about $125 billion over the 1st quarter level. (Again, do not double-count - $38.5 trillion of this is owned by financial intermediaries and passes through to final claimants in the household sector, all included in the net worth discussed above). Household sector debts are marginally below their end of 2007 level, and $200 billion below their cycle peak at the end of the 2nd quarter of 2008 (before the crash).

I hope this is interesting, and questions or comments welcome.

Very interesting. At this rate, it will take until 2011 before household net worth returns to 2007 levels :-(

“These should not be double-counted, the household line contains the other two.”

I didn’t realize this and don’t quite understand it. In a closed system, I guess I “get” that ultimately households must own the capital used by business—either in the form of equities or debt. But we don’t have a closed system. I don’t know the fraction of U.S. capital owned by foreigners, but so long as it’s greater than zero, doesn’t that mean that some portion of corporate and non-corporate business net worth showing up in the separate tables is not accounted for in the household table? Hope this is not a ridiculously naive question.

It is a fine question. There is a "rest of the world" line to reflect net foreign ownership. There is a large gross foreign position in US financial assets, that the Treasury rather than the Fed keeps close track of and reports monthly. But a much smaller net foreign asset position, because Americans own many foreign assets as well.

Some of this is simple intermediation offshore, e.g. with Caribbean island investments in US financial assets, and US household investments in Caribbean island financial assets - that is just how e.g. a hedge fund based in the Caymans will appear in financial data. Some of it is more involved, with e.g. US corporations doing direct investment (FDI, short for "foreign direct investment") in their foreign subsidiaries and the profits there accumulating but reinvested offshore, while US investors own the stock of the parent company in the US.

In the Z.1 dataset, the total credit outstanding sheet is a double entry ledger. Understand this is for debt, and therefore doesn't cover equity or FDI. There is a rest of the world line for the "owed" and for the "owned" sides of this ledger. Right now, the "owed" line reads $1.951 trillion - that means there is debt issued by foreigners and owned by US entities in that amount - and the "owned" line reads $7.716 trillion. Meaning foreign entities hold that much in debt issued by US entities (mostly federal government and agency securities and agency mortgage backeds, but also a significant amount of corporate bonds held in offshore vehicles, or owned by funds or private investors in London, Switzerland, etc).

The net foreign debt is therefore $5.75 trillion, or 11% of the total debts outstanding line. It does not have a material impact on the main net worth calculation, therefore. The biggest issue is the changes in the asset line on the one hand, and any net issuance of new debt to carry more assets on the other hand.

The main illusions people unfamiliar with the data set (or with accounting, come to that) typically suffer from (not imputing any of them to you BTW), are the tendency to equate debt with negative net worth (which is a typical "one entry accounting" mistake, ignoring that someone else has to own anything someone owes), or the tendency to think net worth must be zero (ignoring real final claims in the form of real estate and equity values), or not understanding what must "net out" after all intermediation and what cannot do so.

Basically, all the real assets in the form of real estate and the value of all businesses, must be owned by someone and owned exactly once. When businesses or real estate are financed by partially by debt, this divides the *form* of those final claims between ownership of claims denominated in dollars and those left in equity-ownership form, but it does not change the net amount owned, one way or another. Funding something by debt does not lower its value, it merely pledges some of that value to a lender or bond owner. The total over all claimants combined, is always equal to the full value of all the businesses and real estate. Yes a modest portion of that can be owned by foreign investors.

This gets reapportioned in detail, into individual holdings of stock, mutual funds, indirect claims through pension assets, direct holdings of real estate by homeowners, indirect money claims through bank deposits, themselves backed by mortgages on real estate or loans to corporations, etc.

The overall driver of net worth for everyone combined, is what happens to the top line of all asset values (driven in turn by house prices and the stock market, mostly), and the household portion of total debt on the other (which is effectively carrying a portion of those assets, especially as mortgages used to carry houses). Those lines right now stand at total assets of $67 trillion, household debts of $14 trillion, leaving household net worth at $53 trillion.

I hope this helps...

Many thanks. I understand now. Got a PhD, but never took accounting, so any and all imputations of ignorance you inferred from my question were right on the money!

Trillions make my eyes glaze over: it’s easier to view these sums in more personal terms. I view the U.S. as the equivalent of a household with a) net worth of $53,000; b) an annual net income (after government spending) of about $10,450; and c) future promises to its household members that amount to $104,000 in present value terms. [http://conoverc.wordpress.com/2009/07/01/119/]

In real terms, the annual payments required to pay off that added $104K in looming debts amount to $3,100, meaning we’ll have to be prepared to break these lavish promises or take roughly a 30% cut in our standard of living to bankroll them.

Such a household is not “bankrupt” in the conventional sense, but it surely falls well short of responsible behavior in my book. The picture gets rather considerably more gloomy when we consider that spending on one important necessity of life—medical care unrelated to Medicare or Medicaid—will climb from 12% of our income this year to over 30% within 75 years (Data for Figure 4: http://www.cbo.gov/ftpdocs/87xx/doc8758/Long-TermHealthOutlook_SupplementalData.xls).

Why Gen-X, Gen-Y and the Millenials are not marching in the street over this issue baffles me. But I guess they trust “The One” to fix everything. Sadly, he’s far too chicken to let them know Obamacare would make this bad situation far worse.

Sorry, no, there is no cut in standard of living required to pay ourselves entitlements, they are not charges against our net income. They either form part of that net income as well as being a cost to us - if we honor them - or they don't cost us anything but we don't receive them. You can't make yourself richer or poorer by promising things to yourself. If we promised to support Africa and went through with it, it might make us poorer, but promising to pay ourselves a quarter of our income is a mere redistribution and has no first-order effect on our income or our wealth.

It may have a second order effect through incentives, and may be unwise politically. By a second order effect I mean it might teach people to save less than they otherwise would, and thereby slow the accumulation of capital - because they think someone else will do it for them. By unwise politically, I mean it may set up completely unnecessary fights between generations over shares of income and the like, that are pointless and cannot help anyone in the aggregate. But they can't bankrupt us.

No one entry accounting, that is the underlying rule. Nothing is paid without being somewhere received. Nearly every accounting fallacy or mistake results from violating this rule and pretending a transaction can happen with only one side, the other disappearing into a great void in the sky. If you account for only one side of *any* class of transactions, you can make it appear ruinous and unsustainable and requiring an immediate crash of everything. This has nothing to do with the contents being discussed and is a pure consequence of missing half of the economic reality by simply ignoring it. Like starting a math proof with a false premise, you can deduce anything from it, but it will always be incorrect. Anything follows or nothing, the premise is just false.

You see the same thing when popular finance writers speak about "money flowing into stocks" (where did the stock come from that people bought? Where did the money they paid for it go? Trade in existing commodities can change their relative values but not their quantity in existence; only new issues can change that quantity). It is the same illusion - seeing only one side of a transaction and imagining it is the same for everyone involved.

I hope this helps...

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