U.S. Flow of Funds Shows Outright Contraction of Business Credit; Other Sectors Pay Down except Government

U.S. nonfinancial corporations paid down debt in Q4 2009, according to the Federal Reserve's Flow-of-Funds data reported today, March 11. The contraction was minimal, $8.2 billion at a seasonally adjusted annual rate, but it is the first quarterly reduction since Q3 2002 and it gives a dramatic contrast to the $999 billion borrowing surge in Q3 2007, just at the peak of the late economic expansion.

Total credit market debt contracted as well in Q4, with net paydowns of $577 billion, SAAR, the fourth consecutive negative quarter. The major contributing sector was financial institutions, which pulled down their liabilities at almost a $1.3 trillion annual rate, also a fourth consecutive reduction. The continuing shrinkage of the market for asset-backed securities accounted for the biggest part, as these fell at a $660 billion pace, a ninth consecutive down quarter. Banks, saving institutions and the GSEs' themselves all shrank their liabilities -- although GSE mortgage-backed pools were still expanding -- and finance companies participated in the decline. Among nonfinancial borrowers, households and noncorporate businesses reduced their debt, households for the seventh quarter in a row and small businesses for a fourth quarter.

It almost goes without saying that the Federal Government was an exception to this pattern of debt reduction, although their $956 billion increase was the smallest in six quarters. Such a "pause" is likely to be short-lived. State and local governments, which have run aggregate deficits according to national income accounting since Q4 2007, have also been net borrowers. Foreign borrowers also absorbed some capital in Q4, although modestly less than in Q3 and also modest less than the inflow of funds they provided to domestic borrowers. All told, their participation in U.S. credit markets was quite even-handed in 2009, much more so than in the previous six or seven years.