Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Clarity of our economy at the household level

 

 

Much attention has been given to the plights of Wall Street and the woes of Detroit.  Trillions are being spent to prop up failed businesses.  We all are waiting for the economy to bottom but few are examining this tough economy at a household level.

This posting attempts to do just that.  Taking an average middle income balance sheet from 12/31/07 and the related income and spending for that household and then comparing to 18 months later.  With the exception of interest rates and gas prices, elements that are not a material part of this household's expenses, everything else went south.  Assets were crushed, debt became a four letter word and borrowing capacity dried up.  Out of necessity, the overspending was forced to turn to a respectable savings rate.  But the impact on spending was huge reducing by 19% but this household had to do something.  The negative wealth effect and the reality that bull market buy and hold returns and real estate were not going to provide for a comfortable retirement hit home. 

This is the story of a permanently changed household.  As a boomer, we have seen glimpses of this before.  Where you ask?  It is the people that grew up in the 1930s.  The spend thrifty depression era people.  I'm not saying we are going back to that level but that permanent shift in mentality and spending habits is here.  Think of it as the same thing as having 25% of our spenders acting like they grew up in the 1930s.  This impact spreading through our households like a silent gas - unseen but for its effects.

This decline in spending could take two to three years of 6% annual GDP declines to fully adjust.  We have only had two quarters so far.

So when the "green shoots" pundits claim, often because it is good for their business, that a recovery is just around the quarter.  Remember what is happening in millions of American households.

Balance sheet in 000's

Middle income
Change
Annual income  $  &nb... 90,000  $  &nb... 95,000 6%
Annual spending  $  &nb... 105,000  $  &nb... 85,000 -19%
Over spend (savings)  $  &nb... 15,000  $  &nb... (10,000)
Rate 17% -11%
Assets 12/31/2007 6/30/2009      Notes
Liquid assets  $  &nb... 10  $  &nb... 5
Taxable investments  $  &nb... 40  $  &nb... 20
Tax deferred investments  $  &nb... 200  $  &nb... 120 Market decline
Personal property  $  &nb... 100  $  &nb... 90
House  $  &nb... 350  $  &nb... 228 Case Shiller 20 city index
Cars  $  &nb... 40  $  &nb... 35
Total assets  $  &nb... 740  $  &nb... 498
Liabilities
Bills due  $  &nb... 5  $  &nb... 8
Credit card debt  $  &nb... 10  $  &nb... 20 Overspending
Personal loans  $  &nb... 20  $  &nb... 18
First mortgage  $  &nb... 200  $  &nb... 198
Second mortgage  $  &nb... 100  $  &nb... 110 Overspending
Total liabilities  $  &nb... 335  $  &nb... 354
Net worth  $  &nb... 405  $  &nb... 144 35%
Borrowing capacity  $  &nb... 80  $  &nb... 10