could you clarify - "Since MEW flows to consumption over the next few quarters, this might indicate a slowdown in consumer spending in the near future."
Are you talking about a lag structure, or something else?
What the effects of a slowdown in MEW will have is kind of the key to whether there is a likelihood of a soft landing, or of a bad recession. I think the real answer will only be known in hindsight.
The problem with the soft-landing crowd's take on MEW is that it goes something like this, "Most of MEW has gone to pay down higher interest rate consumer debt, which is a good thing.... and no one has been able to accurately measure MEW's effect on consumer spending..."
The bear argument is very simple: a crapload of money was being added to the economy and it's going to dry up.
I think by 2008, it will be pretty clear who was right.
You say "could" be defined as....Why minus the uses of MEW such as home improvement, purchase of another home, broker fees etc?
I assume the definition of that "left over for consumtion" therefore means only for the consumption of the borrower, (and not for the added consumption by the wages earned by tile guy who fixed up your bathroom, or the appliance salesman who sold you the stainless steel refrig to replace your perfectly fine white one, or the broker, or the realtor....or they guy who makes stainless appliances and on and on.,
Seems a such narrow definition may miss some of the impact of all the "legimate" MEW uses that will also suffer.
Eyeballing your chart, MEW averaged 4% of gdp for 2003-05. Nominal gdp growth for that period was about 7%, so does that mean MEW underwrote about 60% of all gdp growth for those three years? Further, does that imply about 75% of growth in consumption spending for that period was MEW financed, or do I need to adjust that percentage down for investments made from MEW cash? Add in the out-sized gdp contribution from residential construction and related industries over those years, and it seems the entire economic recovery was a product of the housing boom, and gdp growth would have been marginal otherwise.
I too am a little confused why you subtract out the investment in home improvement. If you buy a new washing machine, doesn't that count towards the GDP?
CR - I did some shopping, and I was stunned to see how rapidly prices were going down in a ruralish (small town) area.
I have been expecting to see the effects of the construction downturn and tightened MEW first in areas like my own. Everyone thinks of metro areas, but in reality more of the rural economies are based on small business/housing, and tightened lending has a much more immediate effect in such areas.
I think you have pinpointed a dynamic of today's economy that has escaped most analysts.
Bob-
I was reading a while back that due to MEW, credit card companies had been left with a customer base that consisted mostly of lower tier credit scores, those that would be the most likely to default in a recession.
Will people repeat there bad habits and return to high interest cards after paying them down?
To sort of play Devil's Advocate again, there is one argument that MEW isn't unequivocally bad, and there may be a mitigating factor in the whole mix:
If people have used MEW largely to refinance higher interest credit card debt to lower rates, then there may be some longer lasting positive aspect to this housing binge that offsets some of the negatives.
In other words, some of the increase in consumer spending in excess of income may not retrace because it comes from a sustainable reduction in debt servicing costs related to consumption.
On the other hand, I think it's more likely that this is lead to more frivolous spending and the opportunity to load up once again on credit card debt now that the old balance has been offloaded onto the mortgage.
I know a lot of people who own Hummers that probably shouldn't. But these people also aren't worried yet... so I think the consumer economy may have a bit of breathing room left.
The Dallas Fed had a nice recent paper on this question. The money quote:
The limited U.S. econometric evidence indicates that the strong pace of MEW may have boosted annual consumption growth by 1 to 3 percentage points in the first half of the present decade.[8] This implies that a slowing of home-price appreciation into the low single digits might shave 1 to 2 percentage points off consumption growth and 0.75 to 1.5 percentage points from GDP growth for a few years.
Geoff, yes, there is apparently a lag from when equity is extracted until it is spent.
IM, it's a bit of a guess. Some of residential investment is rental properties - and those shouldn't be included.
Average Joe, good point. What we are trying to determine is the consumption away from residential investment. Since home improvement and broker's commissions are included in residential investment that needs to be subtracted from the increase in mortgage debt.
Obviously the home improvement business will fall off too when people borrow less on their homes (something I've been meaning to write about). However that is already included in my projections on residential investment (so I'm trying not to double count).
And yes, this is the consumer only, not the multiplier effect.
Turbo, I don't think there is any question that MEW boosted GDP. It probably also boosted the trade deficit (and maybe the stock market). How much MEW boosted GDP depends on much flowed to domestic consumption of goods and services. I've graphed some estimates before that you might want to check out.
daveNYC, this is all an accounting problem. I don't want to double count (home improvement is part of residential investment along with new homes and broker commissions). Buying a new appliance is not included in home improvement (I'm pretty sure).
MaxedOutMama, the impact of declining MEW is uncertain, so that is probably why it doesn't get much attention. It will be interesting to see what happens next year.
ron, there is a chance (dryfly has mentioned this before) that people will just start running up their credit cards. No one gives up their lifestyle without a fight!
Howard, that is an excellent note from the Dallas Fed. I posted it when it was released (and the author uses a somewhat similar approach to calculating MEW as I do).
"The limited U.S. econometric evidence indicates that the strong pace of MEW may have boosted annual consumption growth by 1 to 3 percentage points in the first half of the present decade."
And after several years, that would feed itself, the increase in spending created more jobs, more demand for housing, pushing up prices, leading to more MEW... So would a return to average MEW be a 1-3% drag on the economy for several years? less MEW, less spending....
CR, your research is better thought out, more intuitive, and more useful than 95% of what crosses my desk (fixed income at a major ibank). Your previous work, the Dallas Fed piece, etc. suggest that MEW alone sponsored in the neighborhood of half the economic recovery we've experienced. Given that MEW spent most of the 90's in negative territory (in-line with a poor to indifferent housing market for the first half of that decade), I'm amazed very, very few people are even wondering if MEW might go negative again, let alone forecasting it.
turbo, thanks. If you look at the Greenspan-Kennedy paper, MEW was still positive in the mid'90s (but at a much lower level). As an example, in 1994 my simple method shows MEW of negative $45 Billion, but Greenspan-Kennedy calculated a positive $48 Billion.
I find their result a little confusing. In '94, mortgage debt only increased $165 Billion, and there was $301 Billion in residential investment. My number seems to make more sense. Oh well ... our numbers have been close for the last few years.
CR, i thought i had gotten that link from you (i had it in "useful economic reference article links" folder)! yes, i think it's a very reasonable, realistic look.
and just to join in with Turbo, you run one of the most clear-headed, analytical sites around, and you're on my daily read schedule for just that reason....
Just to red-circle MaxedOutMama posted above
I have been expecting to see the effects of the construction downturn and tightened MEW first in areas like my own. [not the rural areas]
And this rings a bell that rang another bell in 2003? when there was a bulge in foreclosures: not from the flabbergastingly high priced markets, but the surrounding rural areas, the bedroom communities that could not afford to live in those hot markets that they served. The geographical implications of the wealth gradient, yes?
And this forum, where would you expect it to lie on that gradient?
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CR,
could you clarify - "Since MEW flows to consumption over the next few quarters, this might indicate a slowdown in consumer spending in the near future."
Are you talking about a lag structure, or something else?
thanks,
G
CR
Why you substract 70% (not 60 or 80%of RI?
Best regards,
What the effects of a slowdown in MEW will have is kind of the key to whether there is a likelihood of a soft landing, or of a bad recession. I think the real answer will only be known in hindsight.
The problem with the soft-landing crowd's take on MEW is that it goes something like this, "Most of MEW has gone to pay down higher interest rate consumer debt, which is a good thing.... and no one has been able to accurately measure MEW's effect on consumer spending..."
The bear argument is very simple: a crapload of money was being added to the economy and it's going to dry up.
I think by 2008, it will be pretty clear who was right.
You say "could" be defined as....Why minus the uses of MEW such as home improvement, purchase of another home, broker fees etc?
I assume the definition of that "left over for consumtion" therefore means only for the consumption of the borrower, (and not for the added consumption by the wages earned by tile guy who fixed up your bathroom, or the appliance salesman who sold you the stainless steel refrig to replace your perfectly fine white one, or the broker, or the realtor....or they guy who makes stainless appliances and on and on.,
Seems a such narrow definition may miss some of the impact of all the "legimate" MEW uses that will also suffer.
P.S.
MEW may also be contributing to U.S. liquidity,a rising stock market and the "wealth effect", as alot of MEW hasn't been consumed but invested.
Eyeballing your chart, MEW averaged 4% of gdp for 2003-05. Nominal gdp growth for that period was about 7%, so does that mean MEW underwrote about 60% of all gdp growth for those three years? Further, does that imply about 75% of growth in consumption spending for that period was MEW financed, or do I need to adjust that percentage down for investments made from MEW cash? Add in the out-sized gdp contribution from residential construction and related industries over those years, and it seems the entire economic recovery was a product of the housing boom, and gdp growth would have been marginal otherwise.
I too am a little confused why you subtract out the investment in home improvement. If you buy a new washing machine, doesn't that count towards the GDP?
CR - I did some shopping, and I was stunned to see how rapidly prices were going down in a ruralish (small town) area.
I have been expecting to see the effects of the construction downturn and tightened MEW first in areas like my own. Everyone thinks of metro areas, but in reality more of the rural economies are based on small business/housing, and tightened lending has a much more immediate effect in such areas.
I think you have pinpointed a dynamic of today's economy that has escaped most analysts.
Bob-
I was reading a while back that due to MEW, credit card companies had been left with a customer base that consisted mostly of lower tier credit scores, those that would be the most likely to default in a recession.
Will people repeat there bad habits and return to high interest cards after paying them down?
To sort of play Devil's Advocate again, there is one argument that MEW isn't unequivocally bad, and there may be a mitigating factor in the whole mix:
If people have used MEW largely to refinance higher interest credit card debt to lower rates, then there may be some longer lasting positive aspect to this housing binge that offsets some of the negatives.
In other words, some of the increase in consumer spending in excess of income may not retrace because it comes from a sustainable reduction in debt servicing costs related to consumption.
On the other hand, I think it's more likely that this is lead to more frivolous spending and the opportunity to load up once again on credit card debt now that the old balance has been offloaded onto the mortgage.
I know a lot of people who own Hummers that probably shouldn't. But these people also aren't worried yet... so I think the consumer economy may have a bit of breathing room left.
The Dallas Fed had a nice recent paper on this question. The money quote:
The limited U.S. econometric evidence indicates that the strong pace of MEW may have boosted annual consumption growth by 1 to 3 percentage points in the first half of the present decade.[8] This implies that a slowing of home-price appreciation into the low single digits might shave 1 to 2 percentage points off consumption growth and 0.75 to 1.5 percentage points from GDP growth for a few years.
Making Sense of the U.S. Housing Slowdown - Economic Letter, November 2006 - FRB Dallas
Geoff, yes, there is apparently a lag from when equity is extracted until it is spent.
IM, it's a bit of a guess. Some of residential investment is rental properties - and those shouldn't be included.
Average Joe, good point. What we are trying to determine is the consumption away from residential investment. Since home improvement and broker's commissions are included in residential investment that needs to be subtracted from the increase in mortgage debt.
Obviously the home improvement business will fall off too when people borrow less on their homes (something I've been meaning to write about). However that is already included in my projections on residential investment (so I'm trying not to double count).
And yes, this is the consumer only, not the multiplier effect.
Turbo, I don't think there is any question that MEW boosted GDP. It probably also boosted the trade deficit (and maybe the stock market). How much MEW boosted GDP depends on much flowed to domestic consumption of goods and services. I've graphed some estimates before that you might want to check out.
daveNYC, this is all an accounting problem. I don't want to double count (home improvement is part of residential investment along with new homes and broker commissions). Buying a new appliance is not included in home improvement (I'm pretty sure).
MaxedOutMama, the impact of declining MEW is uncertain, so that is probably why it doesn't get much attention. It will be interesting to see what happens next year.
ron, there is a chance (dryfly has mentioned this before) that people will just start running up their credit cards. No one gives up their lifestyle without a fight!
Best to all.
Howard, that is an excellent note from the Dallas Fed. I posted it when it was released (and the author uses a somewhat similar approach to calculating MEW as I do).
Best Wishes.
"The limited U.S. econometric evidence indicates that the strong pace of MEW may have boosted annual consumption growth by 1 to 3 percentage points in the first half of the present decade."
And after several years, that would feed itself, the increase in spending created more jobs, more demand for housing, pushing up prices, leading to more MEW... So would a return to average MEW be a 1-3% drag on the economy for several years? less MEW, less spending....
CR, your research is better thought out, more intuitive, and more useful than 95% of what crosses my desk (fixed income at a major ibank). Your previous work, the Dallas Fed piece, etc. suggest that MEW alone sponsored in the neighborhood of half the economic recovery we've experienced. Given that MEW spent most of the 90's in negative territory (in-line with a poor to indifferent housing market for the first half of that decade), I'm amazed very, very few people are even wondering if MEW might go negative again, let alone forecasting it.
turbo, thanks. If you look at the Greenspan-Kennedy paper, MEW was still positive in the mid'90s (but at a much lower level). As an example, in 1994 my simple method shows MEW of negative $45 Billion, but Greenspan-Kennedy calculated a positive $48 Billion.
I find their result a little confusing. In '94, mortgage debt only increased $165 Billion, and there was $301 Billion in residential investment. My number seems to make more sense. Oh well ... our numbers have been close for the last few years.
Best Regards.
Ah, thanks for the clarification.
I wonder what's the best (earliest) way to know how holiday consumption is going?
Which retailers will report it first?
CR, i thought i had gotten that link from you (i had it in "useful economic reference article links" folder)! yes, i think it's a very reasonable, realistic look.
and just to join in with Turbo, you run one of the most clear-headed, analytical sites around, and you're on my daily read schedule for just that reason....
Just to red-circle MaxedOutMama posted above
I have been expecting to see the effects of the construction downturn and tightened MEW first in areas like my own. [not the rural areas]
And this rings a bell that rang another bell in 2003? when there was a bulge in foreclosures: not from the flabbergastingly high priced markets, but the surrounding rural areas, the bedroom communities that could not afford to live in those hot markets that they served. The geographical implications of the wealth gradient, yes?
And this forum, where would you expect it to lie on that gradient?
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