Federal Reserve Q3 2014 Z.1 “flow of funds” report.
The Fed released its Q3 2014 Z.1 “flow of funds” report this week. I won’t take as deep a dive as usual.
Total Non-Financial Debt (TNFD) expanded at a 4.4% rate during Q3, up from Q2’s 3.4% and compared to Q3 2013’s 3.5%. Total Household debt expanded at a 2.7% rate, down from Q2’s 3.4%. And while Household Mortgage debt posted its first expansion in four quarters (0.7%), non-mortgage Consumer Credit slowed to a 6.4% pace, down from Q2’s 8.2% and Q1’s 6.6%. Total Business borrowings expanded at a 5.2% pace, up slightly from Q2’s 5.0% - but weaker than Q1’s 6.0%. State & Local government borrowing contracted at a 2.8% pace during Q3, more than reversing Q2’s 1.2% increase (which was the first positive number in five quarters). The star for the quarter, federal borrowings, expanded at a 7.2% annual pace, up significantly from Q2’s 2.5%.
In seasonally-adjusted and annualized rates (SAAR), TNFD expanded $1.801 TN, up from Q3’s $1.370 and Q1’s $1.688 TN. It was actually the strongest SAAR Credit growth since Q4 2012 ($1.962 TN). It is certainly worth noting that at SAAR $913bn, federal borrowings accounted for about half of TNFD. Household Debt expanded SAAR $366bn (mortgage $67bn and Consumer $206bn). Total Business borrowings expanded SAAR $605bn. State & Local contracted SAAR $84bn.
With equities under a little pressure during the period, Total Household Assets declined slightly in Q3 to $95.410 TN. And with Household Liabilities increasing $121bn (3.5% rate), Household Net Worth declined $141bn during the quarter to $81.349 TN. Over the past year, Household Assets increased $5.467 TN, with Net Worth inflating $5.140 TN. Net Worth was up a staggering $11.823 TN in two years and $26.664 TN in four years. As a percentage of GDP, Household Net Worth has increased from 331% to 463% in four years - to return almost to the record level from the end of 2007 (476%). There would be significant economic impact if Household Net Worth were to give back a few years of inflated gains.
I am fond of analysis that combines Treasury Securities, Municipal debt, GSE Securities, Corporate Bonds and Equities as a proxy for Total Marketable Securities (TMS). After beginning 1990 near $10 TN, TMS ended the nineties at about $33 TN. By the end of 2007, TMS had inflated to $52 TN. As a percentage of GDP, 2007’s 371% compared to 1990’s 178% (and 1999’s bubbly 355%).
TMS ended Q3 2014 at $70.79 TN, or 403% of GDP (both down slightly from Q2). TMS is now up $27 TN, or 62%, from the end of 2008. It is also worth noting that Equities at 200% of GDP surpasses 2007 (182%) and is almost back to 1999’s record 209%. And despite talk of system “deleveraging,” Total Debt Securities-to-GDP ended Q3 at 203%, up from 2007’s 182%, 1999’s 147% and 1989’s 114%.
One doesn’t have to go too crazy in search of cause and effect. The Federal Reserve’s Balance Sheet expanded SAAR $291bn during the quarter to a record $4.508 TN. Fed holdings jumped $720bn over the past year, or 19%. This puts the two-year open-ended QE operation (announced in the summer of 2012) at a staggering $1.700 TN, for 58.8% growth. It’s also worth noting that Security Credit jumped $189bn, or 16%, over the past year to a record $1.373 TN. Throughout the financial sector, no expansion is even remotely comparable to Federal Reserve and Security Credit.
Home mortgage borrowings expanded SAAR $77bn during Q3. This compares to 2005’s $1.128 TN, 2006’s $1.080 TN and 2007’s $771bn. Amazingly, six-years of ultra-loose monetary policy have done little to spur mortgage Credit expansion. And with Fed Credit growth supposedly ending and corporate Credit increasingly vulnerable to the forces of risk-aversion, mortgage Credit becomes only more critical to overall system Credit expansion. A strong case can be made that lowering market yields (and declining mortgage rates) no longer has much impact on mortgage borrowing (Household mortgage borrowings up 1.3% over the past two years!).
It is worth noting that GSE Securities expanded SAAR $225bn during Q3 (to $7.834 TN), up from Q2’s SAAR $185bn expansion. GSE Securities increased $240bn in 2013, the first growth since 2008. And with Fannie and Freddie now moving to lower lending standards, Washington appears ready for another push of GSE-induced Credit growth. As difficult as it is to believe, we’ll have to again keep close tabs on the GSE over coming quarters.
But the winner of the Q3 Z.1 Credit Sweepstakes goes to, once again, the U.S. Treasury. Treasury Securities expanded SAAR $914bn during the quarter to a record $12.756 TN. Over the past year, Treasury Securities increased $799bn, or 6.7%, with a two-year gain of $1.500 TN, or 13.3%. Since the end of 2007, outstanding Treasury Securities has increased $7.656 TN, or 150%. Over this period, total Household Debt declined about $420bn (to $13.414 TN). Tough to call this “deleveraging.”
Expanding upon comments made earlier, I think “ominous” when analyzing this Z.1. There is very little to indicate that an unprecedented expansion of Federal Reserve and Treasury Credit has resuscitated a private-sector Credit cycle. Corporate debt has expanded briskly over recent years, but even this important source of system Credit is now susceptible to both global and domestic forces.
My analytical hunch is that “hot money” flowing freely into our booming securities markets helps explain the robust asset price inflation backdrop in the face of lackluster underlying Credit dynamics. Thus far, troubles at the Global Bubble’s Periphery have ensured that king dollar flows inundate Core U.S. markets. But, again, there will be a point when Global de-risking/de-leveraging leads to waning risk-taking and liquidity – even at the susceptible Core.
I’ve argued for awhile now that the maladjusted U.S. economic structure requires in the neighborhood of $2.0 TN of annual non-financial Credit growth. The number for Q3 came in at $1.801 TN. System Credit has remained meaningfully below the $2.0 TN bogey since 2012. Yet I would argue strongly that the Fed’s massive QE program short-circuited typical dynamics. Miraculously, QE provided “money” for inflating securities prices, for ensuring ultra-loose corporate Credit conditions, for federal and state receipts, for corporate cash-flows and earnings, for record stock buybacks, for record M&A and for lots of spending (especially by the wealthy!). QE incited leveraged speculation and booming “hot money” flows. But QE has ended (for now).