Federal Reserve Q3 2015 Z.1 “flow of funds” report.
Total Non-Financial Debt expanded at a 2.0% rate during Q3, the slowest debt expansion since Q2 2011. Q3 debt growth slowed sharply from Q2’s 4.6% and compares to Q3 2014’s 4.5%. Importantly, the Credit slowdown was broad-based. Household debt growth slowed to 1.5% from Q2’s 4.2%, to the weakest expansion since Q4 2013. Home Mortgage growth slowed from Q3’s 2.4% to 1.6%, while Consumer Credit slowed from 8.5% to 7.2%. Federal government debt growth slowed from 2.4% to Q3’s 0.2%.
Yet the most remarkable Credit slowdown unfolded during Q3 in Corporate borrowings. Corporate debt growth slowed to a 4.3% pace, about half Q2’s 8.8% (strongest since Q3 2013’s 10.1%). In dollar terms, Total Business Borrowings slowed to a seasonally-adjusted and annualized rate (SAAR) of $586bn, down from Q2’s $1.025 TN.
Total Non-Financial Debt growth slowed markedly to SAAR $871bn, the weakest Credit expansion since Q4 2009 (SAAR $686bn) and down from Q2’s SAAR $1.989 TN and Q3 2014’s $1.907 TN. It’s worth noting that the rate of Credit expansion during the quarter was less than half the $2.0 TN bogey that I have posited is required to sustain the Bubble and unsound economic expansion.
Importantly, the Credit slowdown exacerbates already acute system vulnerability to a securities market downturn. With debt market tumult and dislocation building, there will surely be further slowing in Corporate Credit. After the late-nineties boom, Corporate Credit slowed sharply in 2001 and 2002 - and was barely positive in 2003. After peaking at more than $1.1 TN in 2007, Corporate Credit growth was cut in half in 2008, before contracting $455 billion in 2009. Corporate Credit has a strong proclivity for boom and bust dynamics.
The downturn now enveloping Corporate Credit portends a contraction in corporate profits and an abrupt slowdown of income growth. A significant tightening in corporate Credit also has negative ramifications for stock buybacks, M&A and financial engineering more generally. Such a backdrop is negative for stock prices, and Q3 provided a glimpse of the feedback loop of tightened Corporate finance, weaker stock prices, declining household perceived wealth and economic vulnerability.
During Q3, Household (and Non-Profits) Assets declined $1.153 TN, or 1.1%, to $99.55 TN. With Household Liabilities expanding slightly, Household Net Worth declined $1.232 TN during the quarter. For perspective, Household Net Worth increased on average $1.838 TN over the previous 15 quarters. As a percentage of GDP, Household Net Worth declined from Q2’s 482% to 472%. After ending 2007 at 461%, Household Net Worth fell below 350% in early 2009. Household Net Worth closed out Q1 2015 at a record 486% of GDP. It’s worth noting that Households ended Q3 with Financial Assets at $68.925 TN, or 382% of GDP. This compares to 272% to end the eighties, 361% to end Bubble year 1999 and 366% to end 2007.
Rest of World (ROW) holdings of U.S. financial assets declined a notable SAAR $299bn, led by a SAAR $492bn drop in Treasury holdings. This was an abrupt reversal from strong (Trillion plus) annual growth in ROW holdings of U.S. assets over recent years. After expanding SAAR $705 billion in Q2, ROW holding of U.S. Bond’s increased only SAAR $21 billion during Q3. ROW holdings of U.S. equities contracted SAAR $100 billion. Q3 data may suggest waning demand for U.S. securities, or perhaps it reflects more globalized de-risking and de-leveraging pressures.