Article is provided by Goldman Sachs for use by TRUST for Credit Unions.
Goldman, Sachs & Co. and Callahan Financial Services, Inc. are co-distributors of the TCU Portfolios
Third-quarter flow of funds data indicate that US households still have a long way to go in adjusting balance sheets to the deflating equity bubble. This can be seen in two ways. First, household debt, especially mortgage debt, continues to rise rapidly – at annual rates of 9.6% and 12.8% last quarter. As a result, mortgage equity withdrawal has soared to about 4% of disposable income on a spot basis and 2½% on a four-quarter moving average basis.
Second, household net worth fell sharply last quarter, pulling the ratio of net worth to disposable income to its lowest level since the second quarter of 1995. While this ratio has recovered a bit since, the saving rate is unsustainably low relative to our estimates of the current ratio and expected financial asset returns. As a result, it is unrealistic to expect the growth rate of consumer spending to climb over the next year.
In fact, the opposite is much more likely. Support from mortgage refinancing activity is apt to fade as home price appreciation slows – third-quarter figures from the Office of Federal Housing Enterprise Oversight suggest that this is beginning – and as mortgage rates stop dropping sharply. Moreover, the household sector is likely to lift its saving rate. This implies that consumer spending will rise more slowly than income, restraining overall economic growth.
In this context, it is not surprising that retail chains reported dismal sales for November. The Goldman Sachs Retail Index (GSRI) of same-store year-to-year sales changes fell to –1.1%, 3.3 points below the average of the preceding six months. This was a much larger shortfall than in prior years when a late Thanksgiving shortened the holiday shopping season.
Meanwhile, US firms are still trimming staffs despite recent drops in filings for jobless benefits. Nonfarm payrolls fell 40,000 in November, with the factory and retail sectors both noticeably weak (-45,000 and –39,000); some of the retail job declines may reflect reduced seasonal hires. Although the unemployment rate jumped 0.3% points to 6.0%, this was more a correction of previously understated joblessness than a fresh sign of material new weakness.
Prospects for a sustained rebound in US industrial activity may not have brightened as much as implied by several regional reports, judging from the latest national survey of purchasing agents by the Institute for Supply Management (ISM). Its composite index edged up in November, but only to 49.2%, implying a third straight month of slippage. Significantly, the main difference was in readings on orders. Whereas regional surveys generally uncovered strong gains, the ISM orders index slipped a point to 49.9% - the fifth consecutive month it has been within a point of the 50% no change mark. The survey also showed a marked deterioration in export orders versus import orders, consistent with further trade drag.
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The Sector Analysis and Outlooks cited above are synopses taken from various publications of Goldman Sachs Economic and Mortgage Securities Research. Opinions expressed are present opinions of Goldman, Sachs & Co. (“GS&Co.”) only. The material is based upon information which GS&Co. considers reliable, but GS&Co. does not represent that it is accurate or complete, and it should not be relied upon as such. GS&Co., or persons involved in the preparation or issuance of this material, may, from time to time, have long or short positions in, and buy or sell or make a market in the securities mentioned herein.
Goldman, Sachs & Co. and Callahan Financial Services, Inc. are co-distributors of the TCU Portfolios.
Copyright 2002 Goldman, Sachs & Co. Date of First Use: December 20, 2002
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