Flow of funds 2010 Q3: Net worth of households advanced

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This post is a guest contribution by Asha Bangalore, vice president and economist at The Northern Trust  Company.

Net worth of households increased $1.187 trillion (+2.2%) to $54.9 trillion in the third quarter of 2010, the fifth quarterly gain in the last six quarters.  The bulk of the gain in wealth was from an increase in equity prices during the third quarter, while the drop of the real estate component reflects the decline of home prices.  Improving net worth supports expectations of growth in consumer spending in the months ahead.

Debt, private and public, is at the forefront of all policy discussions in the aftermath of the recent economic crisis.  The third quarter flow of funds report indicates that households abstained from borrowing in the third quarter (see Chart 2). The 1.7% decline in credit during the third quarter is the tenth consecutive quarterly drop in household borrowing.

On the other hand, corporate sector borrowing grew 4.5% in the third quarter, the third quarterly gain after posting declines in the second half of 2009 (see Chart 3).

The pace of federal government borrowing is winding down as the final remnants of the stimulus package enacted in 2009 make their way in the economy.  Federal government borrowing grew 16% in the third quarter compared with a nearly 25% increase in the second quarter.  Surprisingly, state and local government debt also grew in the third quarter (+5.2% vs. – 1.5% in 2010:Q2).

Pulling these strands together, private sector borrowing remains significantly weak, while public sector borrowing continues to play the dominant role in credit markets (see Chart 5).

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, December 9, 2010.

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