I’ve been anxiously awaiting the Fed’s Q4 2018 Z.1 “Flow of Funds” report. It provided the first comprehensive look at how this period’s market instability affected various sectors within the financial system. From ballooning Broker/Dealer balance sheets to surging “repo” lending to record Bank loan growth – it’s chock-full of intriguing data. All in all, and despite a Q4 slowdown, 2018 posted the strongest Credit growth since before the crisis – led, of course, by our spendthrift federal government.
Non-Financial Debt (NFD) rose $2.524 TN during 2018 (5.1%), exceeding 2007’s $2.478 TN and second only to 2004’s $2.915 TN growth. NFD closed 2018 at a record 253% of GDP, compared to 230% to end of 2007 and 189% to conclude the nineties. By major category, Federal borrowings expanded $1.258 TN during the year, up from 2017’s $599 billion, and the strongest growth since 2010’s $1.646 TN. Year-over-year growth in Total Household borrowings slowed ($488bn vs. $570bn), led by a drop in Home Mortgages ($285bn vs. $312bn). Total Corporate borrowings slowed to $532 billion from 2017’s $769 billion. Foreign U.S. borrowings declined to $207 billion from 2017’s $389 billion.
On a percentage basis, NFD increased 4.51% in 2018, up from 2017’s 4.10%. Federal debt grew 7.58%, almost double 2017’s 3.74%, to the strongest percentage growth since 2012 (10.12%). Household debt growth slowed to 3.22% (from 3.90%), with Mortgage borrowings up 2.83% (from 3.19%) and Consumer Credit growth easing slightly to 4.88% (from 5.04%). Total Corporate Debt growth slowed meaningfully from 2017’s 5.71% to 3.69%.
For Q4, on a seasonally-adjusted and annualized basis (SAAR), Non-Financial Debt (NFD) expanded $1.390 TN, the slowest expansion since Q4 2016 (SAAR $941bn). This is largely explained by the sharp drop-off in Federal borrowings (SAAR $444bn vs. Q3’s SAAR $1.180 TN).
Outstanding Treasury Securities ended 2018 at a record $17.842 TN, up $1.411 TN (8.6%) for the year to 85% of GDP. Treasuries have surged $11.791 TN, or 195%, since the end of 2007. Agency Securities (debt and MBS) rose $245 billion during 2018 to a record $9.113 TN (2yr gain $592bn). In total, Treasury and Agency Securities surged $1.656 TN last year – accounting for a full two-thirds of total Non-Financial Debt growth. Combined Treasury and Agency debt ended 2018 at a record $26,955 TN, or 129% of GDP (vs. 2007’s $14.685 TN, or 92%).
Broker/Dealer assets surged nominal $165 billion, or 21% annualized, during the quarter, the biggest quarterly gain since Q1 2010. For the year, Broker/Dealer assets jumped $262 billion (8.4%) to $3.359 TN, the largest annual increase since 2007. Debt Securities holdings jumped by $147 billion during Q4, led by a $162 billion increase in Treasuries to $251 billion (more than doubling y-o-y).
The Household Balance Sheet remains a key Bubble manifestation, during the quarter providing a hint of how quickly perceived household wealth will evaporate during a bear market. Household Assets dropped $3.056 TN during Q4 to $120.9 TN, led by a $3.883 TN decline in total equities holdings (Equities and Mutual Funds). And with Liabilities increasing $133 billion during Q4, Household Net Worth fell $3.190 TN (the largest drop since Q4 2008’s $3.835 TN) to $104.869 TN. Household Real Estate holdings rose $279 billion during the quarter and were up $1.319 TN for 2018. (more…)