Thursday, March 06, 2008

About Flow Of Funds Report

While everyone is still focused on the employment report due to be released later today, another very important report was released yesterday: the Flow of Funds report.

On the one hand, it showed that household debt growth is finally starting to recede. Household debt increased just 5.7% (The Fed statisticians claim it is 5.6%, but that's because they don't seem to understand the principle of compound growth) at an annual rate, way below the double digit growth levels we saw between 2002 and the first half of 2006. However, while less bad than before, debt still continues to grow faster than income, as disposable income rose just 3.8% at an annual rate (in nominal terms), and so the debt to income ratio reached a new all time high of 133.7.

And unlike in most recent years, this was not compensated for by rising asset values. Because of both falling house prices and stock prices, household assets fell by 1.7% at annual rate to $72,092.5 billion. As a result of falling asset values and rising debt, net worth declined by 3.7% at an annual rate to $57,718 billion. And remember, that's in nominal terms. Adjusted for inflation, the decline would have been nearly 8%.

This decline is likely to be at least as big, and probably even bigger, during this quarter. With this, and the negative savings rate and the falling real disposable income in mind, falling private consumption in coming months looks inevitable.

Business debt on the other hand continued to show very rapid growth, at 12.6% at an annual rate. While corporate profits somewhat surprisingly rose slightly for domestic nonfinancial companies, they are still way below the levels seen for most of 2006 and 2007 even in nominal terms. Dividend payments on the other hand continue to rise fast, and while investment growth has declined it was still positive during Q4 2007. The rapid debt growth is how companies finance this combination of falling profits, rising dividends and rising investments. However, this is hardly sustainable and means that business investments should start falling too.

As a result, the national savings rate fell to a new low, at 12.7% of GDP in gross savings and 0.6% in net savings (Net savings is basically gross savings minus capital consumption). Both are all time lows except for the brief negative net savings that we saw in Q3 2005 after the massive capital destruction caused by Katrina.

So, this report certainly supports the bearish case. And with total private sector debt still rising at an annual rate of 8.5% (causing the private sector debt to GDP ratio to rise from 168.2% to 169.7%), it again confirms that the talk of a "credit crunch" is a myth.


Anonymous newson said...

when you speak of the credit crunch as a myth, are you not falling into the trap of just seeing the aggregate figures? seems to me there is a dramatic ratcheting up of credit standards for the retail market, more than offset by increased lending to corporates the banks have deemed too large to fail.

4:14 PM  
Blogger Wille said...

it again confirms that the talk of a "credit crunch" is a myth.
That statement definitely holds true in the UK: I have just recently had a mortgage of £300K+ approved, without providing so much as a single document as proof of income OR identity (apparently they trust my credit record and history of residence).
On anecdotal evidence, I know at least three other people who are in a similar situation right now.

Personally, I was rather shocked and appaled at the lack of background check beyond a credit check - you'd think for a rather large mortgage they would at least want to see some ID..

7:30 PM  
Blogger stefankarlsson said...

Newson: The point is that the financial media have created the impression that there is a general credit crunch, disabling even worthy borrowers from getting loans. When I have pointed to the rapid expansion in commercial bank lending as counter-proof, some have argued that I by pointing to commercial banks have a too narrow focus. What this more general report confirms is that the increased commercial bank lending do indeed cancel out the increased difficulty of obtaining credit through various other sources, such as commercial papers.

11:52 PM  

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