Federal Reserve Q3 2009 Z.1 “flow of funds” report.
The Fed’s third quarter Z.1 “flow of funds” report offers little positive news. At a 2.8% seasonally-adjusted and annualized rate (SAAR), Total Non-financial Credit growth actually slowed from Q2’s 4.5%. Non-Financial Credit was up $1.493 TN, or 4.5%, over the past four quarters, a likely insufficient amount to spur self-reinforcing Credit system recovery. Total (non-financial and financial) system Credit actually declined $113bn during the quarter to $52.617 TN, the second straight decline (Q2 down $169bn). Total system Credit increased only $547bn over the past year, or 1.1%, with financial sector Credit down 5.2% y-o-y to $16.1 TN. The ratio of total system debt to GDP was at a near-record 369%.
By major sector, Household Credit declined at a 2.6% rate during Q3, with Mortgage Credit contracting 3.6% SAAR and Consumer debt contracting 3.2% SAAR. Corporate borrowings expanded 1.3% SAAR (up from Q2’s 0.8%), although total Business debt contracted 2.6% SAAR (lower than Q2’s negative 2.2%). State & Local debt expanded 5.1% SAAR, up from Q2’s 3.6% - to the strongest rate of growth since Q4 2007.
Once again, system Credit expansion was almost completely dominated by federal borrowings. For the quarter, federal government debt expanded at 20.6% annualized, down from Q2’s 28.2%, Q1’s 22.6%, and Q4 2008’s 37.0% SAAR. Domestic financial sector Credit contracted 9.3% SAAR, an improvement from Q2’s 12.5% contraction. Foreign sector U.S. borrowings expanded at a 14.9% rate, the strongest since Q1 2008.
In nominal SAAR dollars, non-financial debt expanded $966bn, down from Q2’s $1.514 TN. Household sector borrowings contracted $351bn SAAR, and Non-farm Noncorporate Business declined $368bn SAAR. Non-financial Corporate Business expanded borrowings $94bn, while Farm Business contracted $10bn SAAR. Government debt carried a heavy load. State & Local Government borrowings expanded $116bn SAAR, and the Federal Government increased its debt $1.485 TN SAAR during the quarter.
Over the past year, Treasury debt expanded $1.743 TN, or 30.2%, to $7.521 TN. Treasury borrowings were up $2.270 TN, or 43%, in just five quarters. And despite the contraction in overall mortgage borrowings, outstanding GSE MBS expanded $408bn, or 8.3%, over the past year to $5.30 TN. In the past eight quarters, GSE MBS expanded $1.057 TN, or 25%. For the quarter, GSE MBS expanded $481bn SAAR. In just five quarters, combined Treasury and GSE MBS expanded an unprecedented $2.810 TN. “Flow of funds” data continue to confirm the Government Finance Bubble thesis.
Outside of GSE MBS, the financial sector was notably moribund. In nominal dollars, Asset-backed securities (ABS) declined $152bn, or 15.9%, to $3.650 TN. ABS was down $588bn, or 13.9%, over the past year. GSE balance sheets (as opposed to guaranteed MBS) continue to contract. GSE assets dropped another $140.7bn during the quarter to $3.126 TN, with a one-year decline of $288bn, or 8.4% (as the Fed acquires its massive MBS holdings).
Commercial Bank assets declined a nominal $48bn (1.4% annualized) during the quarter to $14.167 TN. At least this was an improvement from Q2’s $252bn (7.0% annualized) contraction. Less encouraging, Bank Credit dropped a nominal $223bn. Bank holdings of Mortgages contracted a nominal $102bn to $3.796 TN, and bank Loans dropped $165bn to $1.864 TN. Holdings of government debt rose $20bn to $1.365 TN and holdings of corporate bonds increased $8bn to $947bn. On the Bank Liability side, total deposits expanded nominal $99bn, or 5.4% annualized, to $7.383 TN. Bank Credit market borrowings declined $36bn, or 8.3%, to $2.466 TN.
Securities Broker/Dealer assets expanded for the second straight quarter. Asset grew a nominal $44.9bn to $2.062 TN. Holdings of Credit Market Instruments declined $58bn (to $543bn), while Miscellaneous Assets jumped $69bn (to $1.155TN). Broker/Dealer assets are down $940bn, or 31.3%, from a year earlier (although a slug of this – including Bear Stearns and Merrill Lynch - was transferred to Bank assets).
Money Market Fund assets declined a nominal $211bn during Q3 to $3.363 TN. Money Fund assets were little changed over the past year. Life Insurance assets expanded at a 17.3% pace during the quarter to $4.749 TN (up 0.7% y-o-y). Savings Institutions contracted at a 9.0% pace to $1.229 TN (down 11.1% y-o-y). Finance Company assets declined at a 9.7% pace during the quarter to $1.734 TN (down 9.2% y-o-y). Real Estate Investment Trust (REIT) Assets expanded at a 9.4% pace during Q3 to $266bn (down 9.2% y-o-y). Credit Union assets expanded at a 2.2% rate during the quarter and were up 9.2% from a year earlier.
No encouraging news on the fiscal front. Third quarter Federal government Receipts were down 11.2% from a year ago to $2.212 TN SAAR. Federal Expenditures jumped 12.7% to $3.555 TN SAAR. Compared to three years ago, Receipts were down 12% while spending was up 29%. State & Local Receipts were up 0.7% from Q3 2008 to $2.002 TN. State & Local Expenditures were down 1.3% y-o-y to $2.019 TN.
Rest of World (ROW) holdings of U.S. assets increased a small $21bn for the quarter to $15.052 TN. There appears little heightened appetite for our risk assets. Treasury holdings were up $101bn during Q3 to $3.584 TN, with a one-year gain of $794bn, or 28.4%. “Official” Treasury holdings surged $126bn during the quarter to $2.693 TN (up 32.3% y-o-y). Total holdings of Agencies declined $42.6bn during Q3 to $1.319 TN (down 14.1% y-o-y). Holdings of U.S. corporate bonds declined $34bn.
Not surprisingly, the massive inflation of government debt has worked to stabilize system incomes. National Income increased $133bn during the quarter to $12.352 TN SAAR, the strongest expansion in six quarters. National Income was down 3.4% year-over-year. Total Compensation expanded $22bn during the quarter to $7.838 TN SAAR. Total Compensation was down a modest 2.9% from a year earlier.
Massive government borrowings have also helped reflate the Household balance sheet. For the quarter, Household Assets jumped $3.104 TN, or 19.3% annualized, to $67.485 TN. And with Liabilities little changed at $14.061 TN, Household Net Worth rose a notable $3.116 TN to $53.424 TN (one-year high). Real Estate holdings were up $295bn during the quarter (to $18.25TN), the first gain in almost three years. Holdings of Financial Assets surged $2.36 TN (22.4% annualized) for the quarter to $44.415 TN. Over the past year, Household Net Worth declined – a not disastrous - $3.388 TN, or 6.0%. During this period, Real Estate assets declined $2.140 TN, or 10.5%, and Financial Assets dropped $1.740 TN, or 3.8%.