• 288 days Will The ECB Continue To Hike Rates?
  • 288 days Forbes: Aramco Remains Largest Company In The Middle East
  • 290 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 690 days Could Crypto Overtake Traditional Investment?
  • 695 days Americans Still Quitting Jobs At Record Pace
  • 697 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 700 days Is The Dollar Too Strong?
  • 700 days Big Tech Disappoints Investors on Earnings Calls
  • 701 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 703 days China Is Quietly Trying To Distance Itself From Russia
  • 703 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 707 days Crypto Investors Won Big In 2021
  • 707 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 708 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 710 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 711 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 714 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 715 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 715 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 717 days Are NFTs About To Take Over Gaming?
Zombie Foreclosures On The Rise In The U.S.

Zombie Foreclosures On The Rise In The U.S.

During the quarter there were…

How The Ultra-Wealthy Are Using Art To Dodge Taxes

How The Ultra-Wealthy Are Using Art To Dodge Taxes

More freeports open around the…

Market Sentiment At Its Lowest In 10 Months

Market Sentiment At Its Lowest In 10 Months

Stocks sold off last week…

  1. Home
  2. Markets
  3. Other

Another Blow to Household Cash Flow

As my regular readers know - well, it is difficult to have "regular" readers if I don't write regularly anymore - I make a distinction between the wealth effect and the cash-in-hand effect. If the values of your stock portfolio or your house go up, you are wealthier "on paper," but you do not have any extra cash to spend. But if the value of your house goes up and you increase your borrowing against your housing collateral, then you have more cash in hand to spend. Similarly, if a corporation buys back its stock from you, you have more cash in hand to spend. In the first quarter, households' active mortgage equity withdrawal (MEW) in relation to personal disposable income fell to 1.1% -- the lowest since the first quarter of 1996 (see Chart 1). (Active MEW can be defined as mortgage equity withdrawal consisting of refinancing and home equity borrowing in contrast to inactive MEW, which consists of turnover.) Active MEW at 1.1% of disposable personal income is a far cry from the 6% it was in the heady days of 2005 and 2006.

Chart 1

But yet another blow to household cash flow in the first quarter was the sharp reduction in the "retirement" of corporate equities. After retiring a record $840 billion at an annual rate in the fourth quarter of last year, corporations retired only $75 billion of shares in the first quarter of this year (see Chart 2). Now, if corporations are retiring equities, by definition, some entity must be selling shares back to the corporations. In recent quarters, the biggest net seller of corporate equities has been U.S. households. In relation to disposable personal income, households net sales of corporate equities went from a record high 10.3% in the fourth quarter of last year down to only 1.5% in the first quarter of this year (see Chart 3). So, not only was first-quarter household cash flow constrained by much lower MEW, it also was constrained by much lower share buybacks by corporations.

Chart 2

Chart 3

Households: Net Sales* of Corporate Equities / Disposable Personal Income
%

* Direct net sales by households plus net sales by mutual funds,
broker/dealers and ETS.

It almost is a given that MEW will continue to fall as house prices, and, thus, home equity continue to fall. But what about corporate buybacks? They are unlikely to surge again soon for two reasons. Firstly, corporate profit growth, a source of funding for share buybacks, will remain puny throughout 2008, save for energy company profits. Secondly, in recent quarters, as profit growth slowed, nonfinancial corporations picked up their borrowing, in excess of their capital spending, presumably to fund share buybacks (see Chart 4). But with borrowing costs up for the less credit-worthy corporations (see Chart 5) and with financial institutions tightening their lending terms, borrowing to fund share buybacks is likely to be less feasible. In short, retailers had better not count on strong sales once those tax rebate checks have been spent because household cash flow is diminishing at a rapid rate.

Chart 4

Chart 5

 

Back to homepage

Leave a comment

Leave a comment