Data released by the Federal Reserve shows that household sector debt outstanding rose at a 2.5% annual pace in the last quarter of 2012. It was the first time since the beginning of the recovery that household debt didn’t fall as a percentage of GDP. Households had been steadily de-leveraging until the most recent quarter. Debt to GDP remains 15 percentage points below its level at the peak of the cycle and those levels will not likely be seen again soon. Total borrowing by the household sector also increased in the fourth quarter, indicating that the household sector is willing to take on additional debt in this very low interest rate environment.
In terms of net worth (assets minus liabilities), households’ balance sheets are slowly improving, aided by a recovery in the housing sector and rising equity prices. As a percentage of GDP, the fall in household net worth from the peak in 2007 was 4 times as severe as the fall caused by the dot-com bust that spurred the 2001 cycle. The difference, of course, was the collapse of the housing market. The total market value of real estate assets fell 40 percent more than the fall in GDP. This was combined with a similar fall in the value of household’s holdings of financial assets.
Non-financial business corporate debt rose at an even faster pace in Q4 (8.75% annually). A large portion of the increase was due to increased corporate bond issuance.
There has been a lot of talk (here is one example) about how corporations are hoarding cash and are reluctant to invest earnings. The figure below shows the amount of checkable deposits and currency held by the non-financial corporate sector (only one form of liquid assets corporations hold).
The total size of this cash hoard is now nearly twice as high as it was before the peak of the cycle and nearly $400 billion higher than at the trough. Before you make the call in favor of hoarding though, take a look at the evolution of total currency and deposits as a percentage of total assets.
As a percentage of total assets, the business corporate sector’s holding of currency and deposits is relatively low and is returning to the levels of the 1980’s. A similar picture can be shown looking at a broader category of liquid assets (including savings, time depots, mmmfs, etc.). There doesn’t seem to be any extraordinary behavior on the side of firms. Similarly, households appear to be carrying relatively low levels of cash and deposits relative to total assets.
