The U.S. is suffering from insufficient aggregate demand the result of the bursting of the 2004-07 credit bubble.   The consumer led economy financed by borrowing, much of it backed by home equity,  has given way to massive private sector deleveraging as reflected in the charts below.  To cushion the blow, the federal government stepped up deficit spending in an effort to replace the decline in demand.  This is clearly illustrated  in the charts below.

The latest data from the Federal Reserve’s Flow of Funds Accounts show that private domestic credit borrowing of the non-financial sector is still at very anemic levels (see middle chart) .   Though total private non-financial credit growth was flat in Q1, corporate continued to strengthen and consumer credit was positive for the second straight quarter.  This was offset, however, by continued deleveraging in the mortgage and non-corporate business sector.    The negative borrowing is likely both supply and demand constrained.

The charts are revealing as they also illustrate the sharp Q1 drop in public sector borrowing with state and local government turning negative.    Unless private credit significantly improves — net mortgage lending turning positive, for example – to help finance the expansion of domestic demand, the economy will likely remain sluggish as the crunch in public spending continues.   After all,  President Obama did say that “the flow of credit is the lifeblood of our economy.”

Corporate spending and the export sector will have to do the heavy lifting as the U.S. works its way through the credit mess.   The President needs a positive Black Swan event, such as the explosion of the internet, which drove high levels of investment spending during the Clinton Administration,  for example.

Policies to free up financing for small and non-corporate businesses and renewed efforts to clean up mortgage sector, which also allow housing prices to bottom,  could help strengthen the recovery.   Stay tuned, we’ll be back with more analysis of the Flow of Funds.

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(click here if charts are not observable)

Category: Data Analysis, Economy

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6 Responses to “U.S. Macro in Three Charts: Credit Flows”

  1. ilsm says:

    Plenty of credit out there.

    No flow because……………

    People won’t borrow without a job. Who lends to a person without a job?

  2. AHodge says:

    beautiful charts
    also for what happened in 2008
    those geniuses with special insider wall st knowlege
    who swear the big round two was mostly Lehman
    those halls of ivy geniuses who think it was all govt mistakes
    should study these
    epecially Private Sector Credit Market Borrowing in 2Q and3Q 2008
    Lehman went under Sept 15 well after the wall st had “stopped” supplying credit

  3. [...] chart from Barry Ritholtz’s The Big Picture. He uses data from the Federal Reserve’s Flow of Funds Accounts to map credit flows. State and [...]

  4. advocatusdiaboli says:

    “renewed efforts to clean up mortgage sector, which also allow housing prices to bottom”

    BH, that would only solve part of the bank side of the mortgage demand problem. The other side, just as important, are the purchasers of homes. Purchasers need good jobs to pay existing mortgages and qualify for new ones, and mortgage cleanup won’t help that at all. Banks won;t lend to risky purchasers no matter how sable the bank’s balance sheet. The middle class is dying and with it demand for housing. The USA housing market is grossly over stocked as are retail properties. We have a huge mismatch in our home and retail property infrastructure and demand going forward. that dislocation must undergo wrenching change to come into alignment before recovery really starts. and we aren’t even close yet.

  5. cgercke says:

    Seems like personal consumption could grow at the rate of persoanl income if folks neither saved nor dissaved. Why should we need or expect more than that? This fixation on credit growth perhaps stems from a time when consumption growth was much higher than income growth due to dissavings/leverage, powering the economy. I wouldn’t hold my breath for those days to return, but it doesn’t really seem necessary anyway.

  6. A. Wells says:

    Why all these complicated graphs? The obvious solution to weak aggregate demand is to give everybody all the money they want. People who have money don’t need to borrow it. Surely there is no better way to increase aggregate demand, and increase saving rate at the same time.