Written by Steven Hansen
A Federal Reserve data release (Z.1 Flow of Funds) for 4Q2014 – which provides insight into the finances of the average household – shows a modest improvement in average household net worth. Our modeled “Joe Sixpack” – who owns a house and has a job, and essentially no other asset – is no worse or 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.
What is concerning is that the 35% of Americans who have no home or assets are no better off (living from paycheck to paycheck) – and have no path to consume more. This person is not modeled by this index.
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 improved modestly, while cumulative household debt declined for the third quarter in a row.
The Joe Sixpack Index
The Joe Sixpack Index is a composite index of home prices and wage income (again – Joe owns a house, 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.
- The data in this index is only updated every three months, and the data was updated with the release of the Federal Reserves Z.1 Flow of Funds.
- It is inflation and population adjusted.
- Currently, Joe has a house that is increasing in value – and his income in inflation terms grew marginally – so the net affect is that the index improved in 4Q2014 – and now indicates Joe feels no richer or poorer than he did in the last quarter. If Joe is not feeling richer, it is unlikely spending will increase.
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 would be much happier with his situation than Joe Sixpack (although Middle Man’s position is not quite as good as last quarter). It is the growth in value of real estate and other assets that is the governing factor for both Joe and Middle Man. Incomes statistically are growing approximately 2% per year – whilst real median incomes are little changed.
Middle Man Index (blue line, left axis)
My takeaway is:
- The data in this post is not recessionary, however this is a lagging view of the average American’s situation. Having said this, Joe and Middle Man’s consumption is somewhat affected by how rich they feel. It takes some time for the wealth effect to sink in.
- It is believed that the majority of Americans are more like Joe Sixpack than Middle Man. If this is true, it is easy to see that the average American is not in a strong position to consume more – but at least Joe does not feel poorer.
- If all Americans were like Middle Man, likely the economy would be better. It continues to show you need assets to make money.
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:
Average American moron, IQ 60, drinking beer, watching baseball and CNN, and believes everything his President says.
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:
John Q. Public (and several similar names; see the Variations section below) is a generic name in the United States to denote a hypothetical member of society deemed a “common man.” He is presumed to represent the randomly selected “man on the street.” Similar terms include John Q. Citizen and John Q. Taxpayer, or Jane Q. Public, Jane Q. Citizen, and Jane Q. Taxpayer for a woman. The name John Doe is used in a similar manner. For multiple people, Tom, Dick and Harry is often used. Roughly equivalent are the names Joe Six-pack, Joe Blow, the nowadays less popular Joe Doakes and Joe Shmoe ….
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:
- Joe’s median family unit spends or makes about $50K per year
- Joe’s median net worth was $120K in 2007
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.