Federal Reserve Q2 2023 Z.1 “flow of funds” report.
Non-Financial Debt (NFD) expanded at a 6.34% rate during Q2, up from Q1’s 3.78% to the strongest pace of Credit growth since Q1 2022 (8.34%). As has become commonplace, system Credit expansion was driven by heady growth in Federal borrowings. Federal Debt expanded at a 12.67% pace, the strongest growth since the crazy Q2 2020 pandemic borrowing binge (64.61% annualized). Household borrowings expanded at a 2.73% rate, up from Q1’s 2.40% - but less than half of Q2 2022’s 6.89%. Corporate borrowings slowed from Q1’s 4.95% to 2.06%, the weakest reading since the pandemic. And after back-to-back quarters of annualized double-digit growth, Financial Sector borrowings contracted at a 6.36% rate.
In seasonally-adjusted and annualized dollars (SAAR), NFD expanded $4.445 TN during Q2, up from Q1’s $2.625 TN. For perspective, NFD expanded $2.433 TN during (pre-Covid) 2019, while averaging $2.032 TN annually during the decade 2010 through 2019. Prior to 2020’s $6.764 TN, the mortgage finance Bubble period’s $2.506 TN 2007 expansion was the all-time high. At 266%, NFD as a percentage of GDP exceeds previous peak levels 228% (Q4 2007) and 186% (Q1 2000).
Federal borrowings expanded SAAR $3.440 TN during Q2, second only to Q2 2020. Household Borrowings increased SAAR $532 billion, with Corporate borrowings up SAAR $266 billion.
In nominal dollars, system Credit expanded $795 billion during Q2 to a record $96.327 TN, with NFD expanding $1.111 TN (to $71.248 TN) while Financial borrowings contracted $329 billion (to $20.350 TN) (Foreign borrowings were little changed). System Credit posted one-year growth of $4.193 TN, or 4.6%. Over the 14 quarters since the onset of the pandemic, System Credit surged $21.457 TN, or 28.7%. NFD has inflated $16.722 TN, or 30.7%, since the pandemic - and has doubled (plus $35.675 TN) since 2008.
Total Mortgages expanded nominal $158 billion during the quarter, up from Q1’s $143 billion - but less than half of Q2 ‘22’s $422 billion. Total Mortgages expanded $894 billion over four quarters (4.7%), with three-year growth of $3.351 TN, or 20.3%. Home Mortgages expanded $2.263 TN over the past three years, or 19.7%. Multifamily Mortgages expanded $61.6 billion, or 11.9% annualized, during Q2, with one-year growth of $153 billon, or 7.7%. Over three years, Multifamily Mortgages expanded $420 billion, or 25.2%, with Commercial Mortgages increasing $579 billion, or 19.0%.
Bank (“Private Depository Institutions”) Assets contracted (nominal) $233 billion during Q2 to $25.865 TN, a sharp reversal from Q1’s $506 billion expansion - but a slightly smaller contraction than Q2 ‘22’s $251 billion. Reserves at the Fed declined $137 billion (to $3.047 TN) and Debt Securities holdings fell $159 billion ($6.128 TN). Treasury Securities holdings declined $59 billion (to $1.434 TN), Agency/MBS dropped $78 billion ($3.167 TN), and Corporate Debt holdings were little changed ($968 billion).
Bank Loans expanded $101 billion (2.9% annualized) during Q2 to a record $14.239 TN, up from Q1’s $86 billion but down significantly from Q2 2022’s $549 billion. Bank Loans expanded $893 billion over the past four quarters. For perspective, Bank Loans expanded on average $363 billion annually over the 20-year period 2000 through 2019 and $466 billion over the decade ended 2021. For the quarter, Mortgage Loans increased $64 billion (3.9% annualized) and Consumer Credit rose $44 billion (6.7% annualized) – with other loans (including business) posting a small contraction.
Things are a little more interesting on the liability side of the Bank balance sheet. Total Deposits contracted $77 billion during Q2, less than Q1’s $428 billion decline, Q4 ‘22’s $140 billion, Q3 ‘22’s $179 billion, and Q2 ‘22’s $257 billion. Despite five straight quarterly declines, Total Deposits were still up a whopping $4.662 TN, or 30.0%, over the past 14 quarters.
Following Q1’s gangbusters $433 billion, Broker/Dealer Assets expanded only $5 billion to a record $4.809 TN. Loans were down slightly ($5bn) to $638 billion, while Miscellaneous Assets rose somewhat ($4bn) to $1.715 TN. Broker Loans inflated $209 billion, or 48.5%, over 14 quarters. Q2’s $23 billion decline (to $1.638 TN) in “Repo” Assets reduced one-year growth to $292 billion, or 21.7%.
GSE Assets declined $131 billion during Q2 to $9.409 TN. FHLB Loans fell $187 billion during Q2 to $855 billion. Still, FHLB Loans posted one-year growth of $335 billion, or 64.3%. Over six quarters, FHLB Loans expanded $520 billion, or 155%. GSE Assets expanded $1.117 TN, or 13.5%, over six quarters and $2.279 TN, or 32.0%, over 14 quarters.
Treasury Securities expanded $792 billion during the quarter to a record $27.748 TN, with one-year growth of $1.697 TN. Agency Securities declined $69 billion during Q2 to $11.972 TN, while increasing $777 billion over the past year. Treasury Securities inflated $9.934 TN, or 55.8%, over four years, with Agency Securities gaining $2.708 TN, or 29.2%. Combined Treasury and Agency Securities inflated a staggering $12.642 TN, or 46.7%, over 16 quarters to $39.720 TN. Combined Treasury and Agency Securities ended June at 148% of GDP, up from 92% to close 2007.
Total Debt Securities expanded $687 billion during Q2 to a record $60.296 TN, with 15-quarter growth of $13.795 TN, or 30.2%. Total Equities jumped $3.743 TN to $72.893 TN. Total (Debt and Equities) Securities surged $4.430 TN, or 14.3%, to $127.985 TN, with 15-quarter growth of $31.472 TN, or 32.6%. At 482%, the ratio of Total Securities-to-GDP compares to previous cycle peaks 387% (Q3 2007) and 368% (Q1 2000).
The Household Balance Sheet remains at the epicenter of Bubble analysis. Household Assets jumped $5.664 TN, or 13.4% annualized, during Q2 to a record $174.419 TN. With Liabilities increasing $170 billion (to a record $20.138 TN), Household Net Worth inflated a notable $5.494 TN to a record $154.282 TN. It’s worth noting that Q2’s Net Worth gain is the fifth largest ever, lagging only Q1 2019 ($6.242 TN), Q2 2020 ($7.811 TN), Q4 2020 ($8.364 TN), and Q2 2021 ($6.644 TN).
The value of Household Real Estate holdings jumped $2.480 TN to a record $48.870 TN, lagging only Q1 2022’s $3.561 TN increase. It’s worth noting that the largest quarterly Real Estate gain during the mortgage finance Bubble period was Q3 2005’s $864 billion. Over the past 15 quarters, Household Real Estate holdings inflated $15.809 TN, or 47.8%.
Household holdings of Financial Assets jumped $3.084 TN, or 10.8% annualized, to $116.874 TN. Total Equities increased $3.392 TN during the quarter to $59.680 TN. Household Equities holdings as a percentage of GDP increased to 223%. This was down from Q2 2021’s 266%, but compares to previous cycle peaks 146% (Q2 2007) and 172% (Q1 2000). Treasury holdings rose another $154 billion (28.6% annualized) to a record $2.307 TN, with unprecedented one-year growth of $1.462 TN (173%). Agency Securities were little changed during Q2 at $1.259 TN, with record one-year growth of $559 billion, or 80%.
Total Household Deposits dropped $203 billion to $14.180 TN, less than Q1’s $406 billion contraction and the smallest decline in four quarters. The $1.197 TN one-year decline in Total Deposits reduced 15-quarter growth to $3.578 TN, or 33.4%. Money Fund holdings rose another $137 billion during Q2, with one-year growth of $696 billion, or 24.6%. Money Fund holdings jumped $1.374 TN, or 64%, over the past 15 quarters. This puts 15-quarter combined Deposits, Money Funds, Treasuries and Agency Securities at a staggering $5.992 TN, or 39.2%. There’s no mystery surrounding the resilience in consumer spending.
Rest of World (ROW) holdings of U.S. Assets jumped $2.154 TN (19.8% annualized) during Q2 to $45.747 TN, with one-year growth of $4.416 TN, or 10.7%. Total Equities (Equities and Mutual Funds) jumped $1.136 TN for the quarter and $1.752 TN y-o-y – to $13.708 TN. FDI rose $1.056 TN ($1.948 TN y-o-y) to $12.316 TN. Debt Securities holdings increased $114 billion during Q2 to $13.081 TN, with one-year growth of $417 billion, or 3.3%. Over the past year, Treasury holdings increased $203 billion (to $7.620 TN), Agency/MBS $113 billion ($1.317 TN), and Corporate Bonds $64 billion ($3.864 TN). Total ROW holdings inflated $12.995 TN, or 39.7%, over 13 quarters.