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1Q09 Flow of Funds

Tue, Jun 23 2009, 07:29 GMT
by BBVA Bancomer Team

BBVA Group

• Business profits increased 6.1%, but remain low due to feeble demand at home and abroad
• Non-residential investment will decline further in 2Q09, albeit at a slower pace
• Households increased savings and risk aversion in response to financial instability
• Consumer spending is expected to remain weak due to the continuing decline in household wealth

Downward pressure to non-residential investment remains

The pace of business indebtedness slowed further in 1Q09 as financial strains resulting from the ongoing recession inhibit investment. In 1Q09, total corporate liabilities remained relatively unchanged from the previous quarter, while they increased at the slowest rate (2.3%) since 1Q04 on a year-overyear basis. Even though corporate bond issuance rose 3.8%, the largest monthly increase since 2Q01, its positive effect was more than compensated for by declines in trade payables, bank loans, commercial paper and other loans. On a positive note, business profitability improved in the first quarter in comparison to the fourth quarter of last year. Profits increased 6.1%, but remained 24.7% below those of last year due to plummeting sales at home and abroad. This is the ninth consecutive year-over-year decrease in profits.

Additionally, corporate profits as a percentage of GDP rose to 5.0% from 4.7% in 4Q08. Although businesses benefited from an increase in profits this quarter, they still remain low and access to credit is limited, which supports our forecast of further declines in non-residential investment, but at a slower pace, in the remainder of 2009.

Household risk aversion rises due to financial instability

Declines in real estate equity and financial asset prices reduced households’ net worth for the seventh consecutive quarter. Nevertheless, the pace of decline eased to -16.2% yoy from -17.4% yoy in 4Q08. Owner’s equity in household real estate dropped year-over-year for the eleventh consecutive quarter and financial net worth fell for the fifth quarter in a row. As a result, households are increasing their risk aversion and investing in less risky assets. The percentage of households’ liquid assets to total assets has risen to 14.5%, the highest since 4Q92, while total credit market debt fell by 0.6% yoy, the first decline in the history of the data (beginning in 1952).

Furthermore, the personal savings rate has risen to 4.4% of disposable income, the highest point since 2Q98. The trend of increased savings and risk adversion is expected to endure as consumer suffer from an uncertain job market. As a result, consumption expenditures are anticipated to remain weak for the near future.

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Published on  Tue, Jun 23 2009, 07:29 GMT

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4Q08 Flow of Funds

Mon, Mar 16 2009, 11:01 GMT
by Marcial Nava, Nathaniel Karp

BBVA Group

• Business profits declined sharply, affected by the ongoing economic and financial turmoil
  
• We expect further declines in non-residential investment throughout most of 2009
  
• Financial instability has prompted households to rebalance their financial portfolio towards less risky instruments
  
• A sharp deterioration in households wealth poses risks on the outlook for consumer spending
  

Non-residential investment under significant pressures

The ongoing economic recession, financial strains and lower interest rates have reduced the pace of business indebtedness. In 4Q08, total corporate liabilities remained practically unchanged from the previous quarter, while on a year-over-year (yoy) basis they increased at the slowest rate (3.1%) since 1Q04. This deceleration is widespread, yet the impact of the financial turmoil seems to be larger on foreign inflows, trade payables, commercial paper and other loans. A milder effect is occurring on bank loans and corporate bonds, which on 4Q08 accounted for 72% of the increase in total liabilities. The financial and economic downturn is also having a negative impact on business profitability, leaving firms with less internally-generated funds to finance investment needs. Despite monetary policy easing, risk perception remains elevated and firms continue facing high borrowing costs. Plummeting domestic and foreign sales have undermined cash flows. In fact, in 4Q08, corporate business profits declined 24% yoy. This was the eighth consecutive decrease and the sharpest since 1Q02. Meanwhile, the ratio of corporate profits to GDP fell to 5.8%, the lowest since 2Q08. These developments support our prospects of further declines in non-residential investment during 2009.

Downside risks to consumer spending remain

Declines in real estate and financial asset prices reduced households’ net worth by 18% yoy, the largest decline on record, driving the ratio of net worth to disposable income to its lowest level since 1Q95. Mortgage equity withdrawal declined for the sixth consecutive quarter, accumulating a lost of $0.6trn, equal to 4% of GDP. Financial assets went down by the lowest yoy rate since 1952. Financial instability has prompted households to rebalance their financial portfolio towards less risky instruments such as checkable deposits, money funds & time and saving deposits, which reached 18.3% of total financial assets, the highest since 2Q91. This reflects higher risk aversion which increases demand for less volatile assets and increases the personal savings rate, thereby dampening consumer spending. In 4Q08, the savings rate rose to 3.2%, the highest since 3Q01. We expect these trends to continue.

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Published on  Mon, Mar 16 2009, 11:01 GMT

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Businesses under increasing pressure (2Q08)

Tue, Sep 23 2008, 07:15 GMT
by Marcial Nava, Nathaniel Karp

BBVA Group

• · Credit supply for businesses remains solid
  
• · However, profitability is under pressure
  
• · As a result, we expect private investment to slow down
  
• · Personal consumption will decelerate as personal savings increase and households’ net worth decreases

Businesses under increasing pressure

In 2Q08 business debt growth remained solid at 10.1% year-over-year (yoy). However, it was the lowest rate since 3Q06 and around 2 percentage points lower than in the first quarter. Thus, while firms have been able to find funding, total availability appears to be shrinking. In addition, credit supply experienced high volatility in some segments. For example, commercial paper decreased 9.4%, the first decline in almost two years, while corporate bonds slowed to 7.9%, the lowest rate in five quarters. In contrast, trade payables rose 11.9%, the highest rate since 1Q06, while bank loans increased 19.9%, the highest since 4Q73. These trends reflect ongoing financial distress and higher risk perception.

In 2Q08 business profits declined 15.2% year-over-year following a 13.6% drop in the previous quarter. This was the sixth consecutive decrease and the largest in six years. Negative readings of this magnitude are typically associated with economic recessions. The ratio of profits to GDP declined further to 6.6%, almost 2.4 percentage point below their recent peak in 3Q06. These trends suggest that firms have less internally-generated funds to finance their investment needs. Therefore, downside risks on private investment have increased significantly. Firstly, as credit supply becomes scarcer and costlier, and secondly, as firms adjust their capital investment plans to lower profitability.

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Published on  Tue, Sep 23 2008, 07:15 GMT

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U.S: 4Q07 Flow of Funds

Wed, Mar 12 2008, 10:00 GMT
by Marcial Nava

BBVA Group

4Q07 Flow of Funds

• Businesses debt growth remains solid

• Mortgage equity withdrawal has declined $400bn in two years, and reached its lowest level since 1Q02

• Households’ data confirm our scenario of sluggish PCE growth

Business debt expanded solidly

Corporate profits declined 0.5% for the third consecutive quarter, as firms confront ongoing cost pressures and a slowing domestic demand. Consequently, profits’ share of GDP softened to 7.3%, the lowest since 4Q04. Business debt continued to expand rapidly with a gain of 11.7% yearover- year, the strongest since 3Q99. Over the last two years, businesses liabilities have shifted toward bonds and bank loans, away from miscellaneous (funding subsidiaries, finance company subsidiaries, etc.) and commercial paper. As a result, bank loans increased 18% yoy in 4Q07, the fastest pace in almost 30 years.

The financing gap reached $303.3 billion, its highest level since 4Q00. This may be positive for C&I lending and nonresidential investment; however, it is also risky given that credit standards are tightening and corporate profits are decelerating. Weak cash flows and credit scarcity could dampen capital spending plans. Nonetheless, the ratio of net interest payments to economic profits was low and similar to its two-year average.

Households’ real estate wealth extraction declined significantly

Households’ real estate assets decreased to $22.5 trillion in 4Q07 from $22.6 trillion in 3Q07, the first quarterly drop since 1Q93, reflecting the impact of falling home prices. In fact, homeowners’ equity in real state assets declined 3.9% yoy, the lowest on record. Moreover, mortgage equity withdrawal decreased 43.5% in 4Q07, following five consecutive quarters of negative readings. Households’ financial assets declined to $45.3 trillion from $45.6 trillion in 3Q07. This was the first time since 2Q05 that financial assets decrease.

Mortgages liabilities rose to $10.5 billion in 4Q07 from $10.4 trillion in 3Q07, the slowest quarterly growth rate since 4Q97. The pace of consumer credit flattened in 4Q07, reflecting deeper credit constraints. As a result, credit market debt slowed to 6.8% yoy in 4Q07 down from 7.4% in 3Q07, its lowest rate since 2Q98. Tighter lending standards will dampen the pace of credit in the next quarters. Households’ net worth decreased by a quarterly rate of $533 billion to $57.7 trillion in 4Q07. This was the first quarterly decline since 3Q02.

These readings confirm that the housing adjustment and the financial turmoil are taking their toll on household wealth, in line with our scenario of slower consumer spending.

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Published on  Wed, Mar 12 2008, 10:00 GMT

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U.S: Flow of Funds

Wed, Sep 26 2007, 07:34 GMT
by BBVA Bancomer Team

BBVA Group

Second Quarter 2007

• Business debt growth continued during the second quarter of 2007
• Currently the market for commercial paper is “dry” and corporations might rely on either cash reserves or equity for financing
• Household net worth losses momentum and real estate equity reaches the lowest level since 1991

Corporations had a small increase in inventories, which rose less than two tenths of a percent reaching 12.6 trillion, but corporate business net worth rose in 2Q07. The household sector is the principal contributor to the slowdown in non-financial sector borrowing; this deceleration in household debt is consistent with the pattern observed in the last four quarters. Under current conditions, households are not curbing their credit for consumption, such as credit cards, but rather downsizing the growth in the demand for credit used for real estate investments as the housing market continues to adjust. At the same time that households are slowing down their borrowing relative to disposable income, corporations are increasing significantly their borrowing while maintaining their other liabilities unchanged; most of this increase in corporate borrowing is explained by the commercial paper market dryness derived from the sub-prime mortgages spillover effects.

Currently the market for commercial paper is “dry” and corporations might rely on either cash reserves or equity for financing. This could reverse the pattern of “massive” retirement of equity via buy-outs and/ or mergers observed during the last two years. Also, corporate borrowing during 2Q07 increased significantly from 1Q07; this change in corporate borrowing might be explained also, at least in part, by the dryness of the commercial paper market.

During the late 1990s corporations used the market for commercial paper to retire some of their own equity; however, during the current economic expansion most of the retirement of equity was done using after tax profits rather than commercial paper. Under a scenario of moderate economic growth corporate profits might also slowdown putting an end to the buy-out frenzy, in which case the stock market might turn bearish as equity becomes again the preferred financing vehicle.

Household net worth losses momentum and real estate equity reaches the lowest level since 1991. Also, mortgage equity withdrawal (MEW) continues to slow significantly; it fell to 3.0% y-o-y of disposable income. In addition, owner’s equity growth continues to fall, this trend added to the falling (MEW) are consistent with our expectations of gradual moderation in households consumption.

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Published on  Wed, Sep 26 2007, 07:36 GMT

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