Federal Reserve Q4 2025 Z.1 “flow of funds” report.
I’ll be the first to admit that analyzing the Fed’s Z.1 “flow of funds” data offered more fascinating detail and nuance back during the Wall Street/mortgage finance Bubble period. All the same, dissecting Credit and financial flow data remains fundamental to our quest for clearer understanding of what remains an extraordinary financial and economic backdrop.
Total Non-Financial Credit expanded at a 3.4% rate during Q1, up from Q4 2009’s 1.3% and Q3 2009’s 2.7%. For the seventh consecutive quarter, federal Credit completely dominated system Credit creation. Federal borrowings (included in non-financial Credit) expanded at an 18.5% annualized rate, up from Q4’s 12.6% - although slightly lower than Q3’s 20.6%. State & Local debt growth slowed slightly from Q4’s 4.6% pace to Q1 2010’s 4.3%. Total Household debt contracted at a 2.4% rate, versus Q4’s 1.6% pace of decline. Total Business borrowings were about unchanged, a notable improvement from Q4’s negative 3.5%, Q3’s negative 3.0%, and Q2’s negative 2.9%.
At a Seasonally-Adjusted and Annualized Rate (SAAR), Total Financial Credit expanded $1.214 TN during Q1. This was up sharply from Q4’s $454bn and Q3’s $927bn - yet at the same time remains far below 2007’s $2.5 TN and 2008’s $1.9 TN annual expansions. Federal borrowings expanded SAAR $1.446 TN during Q1, up slightly from the year ago $1.440 TN. This massive expansion of federal Credit offset a SAAR $330bn contraction in Household borrowings during the quarter. State & Local borrowings expanded SAAR $101bn, while total Business borrowings were about flat during Q1.
In nominal (non-annualized) dollars, Non-Financial Credit expanded $425bn during Q1 to a record $35.08 TN. This was the strongest debt expansion in five quarters. In the fifth consecutive quarter of contraction, Financial Credit dropped $646bn during the quarter to $14.96 TN. Total (non-financial and financial) system Credit declined $202bn during Q1 to $52.127 TN, or 357% of GDP.
In only 21 months (7 quarters), outstanding federal debt increased $3.274 TN or, 48.9%, to $9.971 TN. Over this period, federal debt growth has been running at an unprecedented rate of about 13% of GDP. As a percentage of annual GDP, federal debt jumped from 46% to 68% in only seven quarters. Of course, the amount of outstanding debt is dwarfed by our federal government’s massive contingent liabilities (i.e. future healthcare, social security and pension obligations). There is, as well, the festering issue of the government-sponsored enterprises (GSEs).
In past analysis, I have combined the growth in Treasury debt with the expansion of federally-backed MBS – referring to this aggregate as “federal finance.” In the six quarters ended December 31, 2009, this “federal finance” had expanded $3.1 TN. Well, the Federal Reserve threw a monkey wrench in my work this quarter by reclassifying Fannie and Freddie MBS.
From the Z.1: “Beginning 2010:Q1, almost all Fannie Mae and Freddie Mac mortgage pools are consolidated on Fannie Mae’s and Freddie Mac’s balance sheets.” After this reclassification, GSE assets expanded $3.874 TN during the quarter to $6.887 TN. Confusing the issue, “Agency- and GSE-backed Mortgage Pools” declined $4.328 TN during the quarter. This leaves $455bn of MBS unaccounted for, perhaps partially explained by large write-downs. And in another confounding twist, Asset-Backed Securities (ABS) contracted $580bn during the quarter to $2.798 TN. Combined GSE, MBS and ABS dropped $1.035 TN during Q1 to $10.733 TN. I’m at a loss
From elsewhere in the "flow of funds," we see that Total Mortgage debt contracted a nominal – and quarterly record - $140bn during Q1 (3.9% annualized). Home Mortgage debt fell $110bn (to $10.75 TN), with a one-year decline of $311bn (2.8%). Commercial Mortgage debt dropped $34bn during Q1 (to $2.46 TN), with a one-year contraction of 4.5%. Q1 changes to the holders' quantities of Total Mortgage debt are inconsistent with the presentation of GSE, mortgage pool/MBS and ABS assets (on separate Z.1 pages) – though this presentation does make more sense. Mortgage pool holdings of mortgages dropped $4.328 TN, while (reclassified) GSE holdings jumped $4.363 TN. ABS holdings of mortgages declined $98bn.
Bank assets expanded (nominal) $306bn in Q1 to $14.439 TN, with Bank Credit up a notable $241bn to $9.538 TN. Yet the Fed’s seasonally-adjusted “flows” data present an ongoing contraction in Bank assets and Credit. For Q1, Bank loans contracted SAAR $251bn and Mortgages contracted SAAR $369bn. On the growth side, Reserves at the Federal Reserve expanded SAAR $215bn (to nominal $964bn) and Treasury Securities jumped SAAR $236bn (to nominal $252bn). With Bank business loans down five straight quarters, one has to be a real optimist to see positive trends in Bank Credit.
The bulls can, however, look to income data for some encouragement. National Income expanded at a decent clip again during Q1, posting a y-o-y increase of 3.2% to $12.602 TN. Total compensation expanded for the first time in six quarters, in the process bringing y-o-y compensation back to down only 0.2%. Massive fiscal stimulus has succeeded – for now – in stabilizing national incomes (and spending!).
Fiscal and monetary stimulus has also worked to shore up the Household Balance Sheet. Household sector Assets increased $965bn during Q1 to $68.536 TN. And with Liabilities down another $98bn (to $13.970 TN), Household Net Worth increased $1.063 TN during the quarter (7.9% annualized) to $54.565 TN. Certainly helping to explain the consumer’s relatively upbeat mood and spending habits, Household Net Worth was up $6.297 TN y-o-y, or 13.0%. Examining the past year’s gain in Household wealth, it is worth noting that Financial Assets increased (inflated) $5.514 TN (13.8%) and Real Estate gained $545bn (3.1%).
It’s not only households that are boosting holdings of securities. Rest of World (ROW) holdings of U.S. Financial Assets jumped nominal $299bn during Q1 to $15.625 TN. Treasury holdings rose $198bn to $3.936 TN. Treasury holdings increased $553bn over the past year and $1.437 TN over the past two years. “Security Repos” increased $47bn during Q1. Holdings of U.S. corporate bonds declined, while holdings of our equities increased.
Examining the broader U.S. financial sector, there is a pulse but certainly no sign of vigor. Securities Broker Assets were little changed during Q1 at $2.081 TN. Broker holdings of Treasuries, agencies and municipal securities grew a little, while equities, Security Credit, and Misc. Assets declined a little. Funding Corp asset dropped $96bn during the quarter to $2.391 TN, with a one-year drop of $457bn (16.1%).
Life Insurance assets expanded 7.8% annualized to $4.919 TN (up 11.2% y-o-y), probably mostly explained by the recovery in equities prices. Savings Institution assets expanded 0.9% annualized during Q1 to $1.127 TN. Finance Company assets were also up less than 1% annualized during the quarter, to $1.666 TN. Credit Union Assets expanded at a 4.4% pace to $892bn (up 4.3% y-o-y). REIT Assets increased at an 11.6% rate to $263bn (up $4.3bn y-o-y).
Money Market Fund assets declined $328bn during the quarter to $2.931 TN. Money Fund assets were down $1.312 TN from Q1 2009, an unprecedented one-year decline. In the past seven quarters, Federal Reserve assets expanded $1.387 TN, or 146%. Fed assets grew $71.5bn during Q1 to $2.339 TN, with a one-year gain of $221bn (10.5%). After closing 2008 at just under $20bn, the Fed’s holdings of Agency- and GSE-backed securities ended Q1 at $1.238 TN.
My thesis holds that our markets and economy have been reflated by a Government Finance Bubble (massive debt issuance, bailouts, market interventions, zero rates, Trillion-plus monetization, etc.). With this in mind, let’s take a little closer look at government spending and receipts data. Q1 Federal expenditures were up 13.2% y-o-y to SAAR $3.654 TN, or 25% of GDP (receipts up 2.2% y-o-y to $2.301 TN). Keep in mind that annual Federal expenditures surpassed $1.8 TN for the first time in 2000. Less than a decade later, spending is running more than double this level. Federal Expenditures were less than 19% of GDP in 2000; less than 20% in years 2001-2002; less than 21% in 2003-2007; 21.6% in 2008; and 24.2% in 2009. In contrast, Federal Receipts, which began the decade at about 20%, were 15.6% of GDP in 2009 and were running at 15.7% in Q1 2010.
At SAAR $2.046 TN, Q1 State & Local expenditures were about 14% of GDP. Combined State & Local and federal expenditures were 39% of GDP in Q1, after beginning the decade at about 32%.