Destruction of Household Wealth

Inquiring minds are diving into the Z.1 Flow of Funds Accounts of the United States for the third quarter 2008. It's a mammoth 124-page publication that came out on December 11th, but some probably haven't seen it yet.

The following chart comes from page 113 of the PDF.

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• 2007 Q4 -$1.46 trillion
• 2008 Q1 -$2.42 trillion
• 2008 Q2 -$0.39 trillion
• 2008 Q3 -$2.81 trillion

$7.08 trillion in wealth has vaporized in the past year. Figure 2008 Q4 looks to be as bad as Q3. If so, roughly $10 trillion in household wealth will be vaporized in little over a year. And looking ahead, there's no reason to believe the stock market, the housing market, or the economy will show signs of recovery anytime soon.

Destruction of wealth has clearly affected consumer spending, as discussed in Consumer Demand For Nearly Everything Plunges.

It's important to keep the above in mind before getting hyperinflationary ideas about Obama's expanding recovery plan, which is now aiming to create 3 million jobs. Obama needs to create 3 to 4 million new jobs just to counterbalance another 3 to 4 million layoffs that I foresee for 2009. I doubt he can do that quickly, if indeed at all.

Bleak Employment Situation

Economists expect unemployment to rise to 9%, but I think 10% or higher is more likely. And that 10% is based on the "official" number.

One can find a better approximation of what the unemployment rate really is on Table A-12 of the Department of Labor Monthly Employment Report. Take a look:


Click to enlarge.

The official unemployment rate is 6.7%. However, if you start counting all the people that want a job but have given up, all of those with part-time jobs who want full-time jobs, everyone who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row, labeled U-6.

Bleak Wage Conditions

Many corporations are cutting or freezing wages. Here are a few examples.

From Financial Times, FedEx (FDX) says it will cut wages in the face of downturn:

"FedEx on Thursday moved to slash employees’ salaries and other benefits in the face of what Fred Smith, chief executive, called “the worst economic conditions in the company’s 35-year operating history.

Portland Business Journal reports that Weyerhaeuser (WY) also cuts dividend and freezes salaries:

"Timber giant Weyerhaeuser reduced its quarterly dividend from 60 cents to 25 cents and froze all executive and salaried wages at 2008 levels. Weyerhaeuser said the continued housing slump and a weaker pulp market will result in 'significantly lower-than-expected fourth-quarter earnings' and the company 'expects challenging market conditions to continue through 2009.' The company’s board also reduced capital spending next year from $425 million to between $200 million and $250 million."