Monday, February 4, 2013

Stagreflation and Unemployment

One benefit of rising asset prices is the wealth effect; also, businesses will begin hiring when their balance sheets are no longer underwater.  Household real estate assets increased year-over-year in 2012.  Residential investment increased some but not enough to justify the increase in assets which were propelled higher by low inventories.
Household real estate (blue); unemployment (red).  Household real estate values are growing - helping to bring household balance sheets into the positive.

Median sales price of houses (green); unemployment (red).  Rising real estate prices in a low-inventory housing market have helped raise household real estate values.

S&P 500 (black); unemployment (red).  Stock prices rise as cash flow and asset prices increase; business activity picks up and businesses begin hiring again.
Unemployment initially benefited from the reflation in asset prices, but during the last quarter of 2012 unemployment was stagnant while real GDP declined.  The initial reason for negative real GDP was placed on a decline in real government consumption and investment; however, real gross private domestic investment (not as large) declined in real terms but not by as much as real government consumption and investment.
Real gross private domestic investment (blue); real government consumption expenditures and investment (red).
To be fair, the next round of quantitative easing, by its true definition, has only recently begun and may have the expected impact on unemployment that the earlier rounds had.
QE 3.0 began in January.

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