MARKET MOVER - BNP PARIBAS - Investment Services India

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