MARKET MOVER - BNP PARIBAS - Investment Services India
MARKET MOVER - BNP PARIBAS - Investment Services India
MARKET MOVER - BNP PARIBAS - Investment Services India
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US: Wealth Fell, Deleveraging Continued in Q2<br />
• The latest Flow of Funds accounts indicate<br />
that household wealth fell in Q2, largely in line<br />
with the decline in equity indexes.<br />
Chart 1: Net Worth Fell in Q2<br />
• Total domestic debt increased in the first<br />
half of the year as continued private sector<br />
deleveraging was more than offset by federal,<br />
state and local government borrowing.<br />
• Debt ratios have fallen significantly from<br />
their peaks at the beginning of 2008.<br />
Nevertheless, consumers remain cautious in<br />
their spending, focusing primarily on<br />
necessities.<br />
• The business sector data for Q2 indicate<br />
companies’ persistent caution with regard to<br />
investing in expansion or hiring more workers.<br />
Source: Reuters EcoWin Pro<br />
Chart 2: Total Debt Rose as Governments<br />
Borrowed to Finance Deficits<br />
The Federal Reserve’s Flow of Funds accounts<br />
for Q2 2010 showed a drop in household net<br />
worth on the back of stock market declines<br />
Household net worth declined USD 1.52trn to USD<br />
53.5trn in Q2, driven mainly by capital losses on<br />
equity holdings. Meanwhile, real estate values picked<br />
up slightly in Q2 as tax incentives pushed house<br />
prices higher. Broad equity indexes dropped 11.4%<br />
in Q2 but have advanced 9.1% since then –<br />
suggesting net worth will increase in Q3. As shown in<br />
Chart 1, household net worth as a percent of<br />
disposable personal income declined for the first time<br />
since the troughs reached in Q1 2009 and is now<br />
back below levels seen in 1995 (before the start of<br />
the internet bubble in equity prices). The likelihood of<br />
house prices stagnating in H2 and the possibility of<br />
below-potential GDP growth in the coming quarters<br />
have interrupted the recovery in net worth and<br />
flattened the outlook for consumer spending.<br />
Private sector deleveraging continued in Q2 at<br />
roughly the same pace as the beginning of the<br />
year<br />
The data indicate that private sector deleveraging<br />
continued at a rapid pace in Q2. As shown in Chart<br />
2, expansion in public sector borrowing more than<br />
offset the contraction in private sector credit in Q1<br />
and Q2. Federal, state and local governments<br />
borrowed to finance their massive budget deficits.<br />
Household borrowing contracted 2.3% in Q2, an<br />
acceleration from the 1.7% fall in Q1 as both<br />
mortgage and consumer credit posted sizable<br />
declines. Non-financial corporations increased their<br />
borrowing by 3.8% in Q2 following a 5.2% rise in Q1<br />
2010 as firms tapped the bond market in size.<br />
Source: Reuters EcoWin Pro<br />
However, the noncorporate sector reduced its<br />
borrowing by a similar amount and overall the<br />
business sector was neutral on aggregate borrowing.<br />
The financial sector continued to deleverage at a<br />
much faster pace than other sectors, with net<br />
borrowing declining 7.1% after a 7.5% drop the prior<br />
quarter (the pace of decline has nonetheless slowed<br />
from over 10% in 2009).<br />
Debt ratios have fallen significantly from their<br />
peaks at the beginning of 2008. Nevertheless,<br />
consumers remain cautious in their spending,<br />
focusing primarily on necessities<br />
Consumers continued to reduce their debt, largely by<br />
defaulting on their credit cards and mortgages. In<br />
fact, the quarterly government data on commercial<br />
banks suggest charge-off rates on credit cards<br />
reached their all-time highs in Q2, rising to 10.7% of<br />
banks’ average loan balance. The Federal Reserve<br />
Financial Obligation Ratio (FOR), which includes<br />
automobile lease payments, rental payments on<br />
tenant-occupied property, homeowners' insurance<br />
Yelena Shulyatyeva 23 September 2010<br />
Market Mover<br />
6<br />
www.GlobalMarkets.bnpparibas.com