This report follows up on a claim I made on Wednesday: that the aggregate position of the domestic private sector is one of healthy financial surplus.
The focus is on financial trends in the household sector. The most important point raised here is that those upward revisions in the personal saving rate, reported with the release of the Q2 GDP report, have mapped directly to an equivalent improvement in the household sector’s financial balance, which is actually the more important variable from a business cycle stability perspective.
Related, financial trends in the household sector generally look quite healthy, at least taken in aggregate. For example, household-sector “de-leveraging” has not itself been a restraint on aggregate demand growth, but it does nevertheless leave the household sector in a quite strong position looking forward. In this particular application, the demand bulls can in fact have it both ways! The magic is in low interest rates and in the credit-intensive sectors of the economy having been so depressed at the lows of the cycle.
This is not the only consideration facing fixed income investors. The risks of a contractionary shock, from domestic politics or overseas need also to be monitored. But taken in isolation, this story favors continued Fed tightening.