Magazine article Economic Trends

GDP Growth and Household Finances

Magazine article Economic Trends

GDP Growth and Household Finances

Article excerpt

According to the preliminary estimate from the U.S. Commerce Department's Bureau of Economic Analysis, real gross domestic product (GDP) rose at an annual rate of 4.4% for 2004:IQ, up from the advance estimate of 4.2%. Most of the revisions were minor; the most significant were modest increases in inventories and imported goods.

Because of its larger share, the major contributor to real GDP growth was personal consumption. Contributions from business fixed investment, change in inventories, and government spending were similar to one another.

Blue Chip forecasters expect solid economic growth to continue at an annual rate of about 4%, well above the 3.1% averaged over the last 30 years.

Because personal consumption accounts for roughly 70% of GDP and about 60% of the change in real GDP over the last year, the household sector's health is an important concern for policymakers. One positive sign is that real personal disposable income has grown at an annual rate of at about 4% since last September; however, it has been more than matched by growth in real personal consumption expenditures. These expenditures have been fueled partly by rising levels of consumer credit outstanding, which topped $2 trillion for the first time at the beginning of the year.

Is this high debt load cause for concern? Bankruptcy filings have been down in the last two months but they remain at a fairly high level despite a significant decline late last year.

Some analysts consider the level of personal bankruptcies to be a flawed measure of household financial health because it is affected by changes in lender practices and the law. Delinquency rates, another measure of consumers' ability to keep up with debt obligations, have been on a downward trend for real estate loans and fairly flat for consumer loans. Many observers prefer to look at debt service ratios because they include information from all households, not just those filing for bankruptcy or falling behind in their payments. This ratio has risen only modestly for homeowners since the early 1990s but much more sharply for renters. Since the beginning of 2003, the ratio for both groups has been flat or declining.

Of course, to assess the financial health of households fully, one must look not only at their incomes and liabilities but also at their assets. Before the stock market drop that followed the dot-com collapse, the average ratio of household assets to debts was fairly flat going back to 1989. …

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