Q4 2012 Flow Of Funds
Commentary and weekly watch by Doug Noland
For years, I would anxiously await the opportunity to sift through each new voluminous quarterly Z.1 ”flow of funds” report from the Federal Reserve. On a quarterly basis, the Federal Reserve’s credit data illuminated the evolving US bubble – with each report reliably offering additional clues and credit insight.
The past few years analyses have been somewhat boring to write and, surely, painful to read. More recently, however, the data have again turned more interesting. As you read through this analysis, please keep in mind the Fed’s decision to increase quantitative easing to US$85 billion monthly beginning this past January.
For Q4 2012, total non-financial credit expanded at a 6.4% rate, the strongest expansion since Q3 2008 (7.0%). Total household borrowings expanded 2.4% annualized, the briskest pace going back to Q1 2008 (3.6%). Household mortgage credit contracted 0.8% annualized, the smallest pace of decline since Q1 2009 (positive 0.2%). Corporate borrowings grew at a blistering 10.7% pace, the quickest since Q4 2007 (11.5%). Federal debt expanded at an 11.2% rate during the quarter. In nominal dollar terms – seasonally-adjusted and annualized (SAAR) – Q4 total non-financial credit expanded $2.536 trillion. Looking at the main categories, Total household debt increased SAAR $312 billion, total business SAAR $1.076 trillion, and Federal Government SAAR $1.259 trillion. Credit expansion has become increasingly broad-based.
For full-year 2012, total non-financial Debt (NFD) expanded $1.848 trillion, up from 2011’s $1.351 trillion to the strongest pace since 2008. For comparison, NFD increased $1.457 trillion in 2010, $1.078 trillion in ’09, $1.907 trillion in ’08, $2.552 trillion in ’07, $2.387 trillion in ’06, and $2.343 trillion in ’05 (nineties avg. $715 billion). For the year, household debt growth turned positive for the first time since 2007, with the strongest (non-mortgage) Consumer credit growth ($154 billion) since 2000 just offsetting the continued contraction in Mortgage borrowings. Total Business credit expanded $687 billion, up from 2011’s $546 billion for the strongest expansion since 2007’s booming $1.316 trillion (business credit expanded $163 billion in 2010, after contracting $245 billion in ’09). The growth in Federal government market debt increased to $1.140 trillion, up from 2011’s $1.068 trillion – for the fifth straight year of trillion-plus deficits.
I’ll briefly interrupt Q4 2012 ”flow of funds” analysis in order to update data for the deleveraging vs. leveraging ”debate”. The fourth quarter’s $655 billion expansion pushed total non-financial debt (NFD) above $40 trillion ($40.099 trillion) for the first time. In the past four years, NFD has increased $5.620 trillion, or 16.3%. As a percentage of GDP, NFD ended 2012 at a record 253%, up from 232% to end 2007 and 240% to conclude 2008. It is worth noting that household liabilities contracted $663 billion over the past four years, while Federal debt expanded $5.580 trillion.
Total (non-financial and financial) system credit ended 2012 at a record $56.281 trillion (355% of GDP). Total system debt growth has been somewhat restrained by the four-year $3.261 trillion drop in Financial Sector debt obligations to $13.852 trillion (low since 2006).
As I have tried to explain in previous CBBs, the contraction in US financial sector credit market borrowings has been chiefly due to the shift of assets onto the Fed’s balance sheet coupled with the significantly reduced intermediation requirements for government debt when compared to mortgage credit (no need for the financial sector to securitize/intermediate Treasury bills, notes and bonds!). Especially after 2012’s strong credit expansion, the deleveraging thesis has become even more flimsy.
Much of ”deleveraging” analyses focuses on the decline in household debt. In aggregate, total household liabilities contracted $663 billion, or 4.7% during the past four years to $13.453 trillion (worth noting liabilities ended 2000 at $7.353 trillion). Meanwhile, fueled by a remarkable accumulation and price inflation in financial asset holdings, total household assets surged $11.764 trillion, or 17.4%, in four years to a record $79.525 trillion (up 57% since 2000).
Over four years, household net worth (assets minus liabilities) jumped $12.428 trillion, or 23.2%. Notably, household net worth surged $5.464 trillion, or 9.0%, during 2012, surely helping to explain the ongoing vigor in household consumption. As a percentage of GDP, household net worth jumped to 421%, down from the 2006’s real estate bubble spike to 490% but still significantly above the 385% average for the period 1985-2003