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U.S: 4Q07 Flow of Funds

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

BBVA Bancomer

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  Tue, Apr 1 2008, 15:54 GMT