posted on 12 December 2015
Written by Steven Hansen
The Federal Reserve data release (Z.1 Flow of Funds) for 3Q2015 - which provides insight into the finances of the average household - shows a modest degradation in average household net worth. Our modeled "Joe Sixpack" - who owns a house and has a job, and essentially no other asset - is better off than he was last quarter.
You may ask why this analysis is important? It looks at the financial health of the consumer - and in a consumption based economy, it measures the dynamics affecting the consumer.
35% of Americans who own no home or have any other assets are no better off (living from paycheck to paycheck) - and consumption is based simply on income. It is obvious that the median household is not as well off as before the Great Recession.
As the US Census does not update the above graph in real time, we must rely on Sentier Research's Household Income Index [click here to read analysis of the current situation]. Here is the graph from their analysis which shows that REAL household income is on an improving trend line.
First, from the Z.1 Flow of Funds report, what was shown about Household Net Worth and Growth of Domestic Nonfinancial Debt. Cumulative Household net worth declined, while cumulative household debt growth declined significantly.
The Joe Sixpack Index
The Joe Sixpack Index is a composite index of home prices and wage income (again - Joe owns a house with a mortgage, has a job, and no other assets). This index was designed to measure how rich Joe should feel. The theory is that the richer Joe feels, the more Joe will spend.
Joe Sixpack Index (blue line, left axis) shown against GDP (red line, right axis)
The Middle Man Index
The middle class household with financial assets and real estate assets is Middle Man. A Federal Reserve Publication shows the percentage of households owning various financial assets. Other than real estate, Middle Man holds transaction accounts (checking - 1% of all financial assets) and retirement accounts (roughly estimated by Econintersect at 25% of household financial assets).
Unfortunately, retirement accounts are not separately detailed in the Z.1 reporting - but the graph below uses 25% of the change in Total Household Assets as a proxy for change in retirement accounts.
Total Household Assets (blue bars) vs Savings (red bars)
Adding the financial assets of Middle Man to the housing and compensation data used in the Joe Sixpack index, we see that Middle Man is better off than last quarter with his situation - but the rate of improvement is slowing. It is the growth in value of real estate and other assets that is the governing factor for Middle Man (not wages).
Middle Man Index (blue line, left axis)
My takeaway is:
Caveats on this Post:
Most of the data in this post comes from "Flow of Funds Accounts of the United States" (Z.1) data release from the Federal Reserve which is released quarterly. Although Econintersect can validate the data in general using other sources, micro movements are difficult to validate. Importantly, the Z.1 data is a treasure chest of aggregated data across all sectors of the economy - and an invaluable tool in evaluating historical relationships.
To begin, one needs to define Joe Sixpack. Urban dictionary defines Joe:
Too many of us think we are smarter than Joe - and are above Joe in the social order. But many of us are Joe. Per Wikipedia:
Almost all Americans who MUST work to survive are Joes. Americans who are relying on some level of earned income during retirement are Joes. I believe many who see themselves as middle class (educated or not - professional or blue collar) is a Joe. Joe is somewhere around average American:
We specify by definition that over 50% of Americans are Joes.
Note: The Z.1 data is based on averages not medians. In other words, the rich are getting richer - and this influences the averages.
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