Flow Of Funds Update: Aborted Attempt To Hand Over Releveraging From Government To Business Sector?

We have complete the cursory first run of the just released quarterly Flow of Funds (Z.1) updated for Q1 2011. While we will present the far more important breakdown of the shadow economy, we first focused on the key asset and liability data covering the household, corporate and government sectors, which presented few surprises. In summary, total household net worth increased by $1 trillion from $57.1 trillion to $58.1 trillion in the 3 months ended March 31, 2011. This the highest level of household net worth since Q2 2008 when it stood at $60 trillion, and still down substantially from the all time high of $65.7 trillion in the summary of 2007, or the peak of the credit bubble. Looking at the asset components we see once again just why Bernanke is so focused on pumping up the Russell 2000: the stock market (through holdings of corporate equities, mutual fund shares, and pension fund reserves), accounted for $1.2 trillion of the $1.0 trillion increase. This paper profit was offset by a $349 billion drop in mortgage equity, which declined to $18.1 trillion, the lowest in almost a decade. Additionally, household deposits increased to the peak level of $8 trillion once again, which is explainable since household liabilities declined with a drop in both mortgage ($68 billion) and consumer ($31 billion) debt. In a nutshell the consumer continues to delever. But probably the most surprising move was the substantial drop in the positive contribution to total debt from state and government debt. Coming in at $9.6 trillion, total government debt outstanding, rose by the lowest amount since Q2 of 2008, courtesy of a modest increase in Federal Government debt of $184 billion and an actual decline in state and local government debt of $18 billion.

The offset to this gradual phase out of the government was the increase in non-financial business debt, which increased at a 4% SAAR rate, the highest since Q3 of 2008. In other words, just as the government was preparing to handover the releveraging baton to corporate America the economy appears to have stalled. The biggest wildcard thus is whether in absence of Consumer releveraging, and the phasing out of the government debt, whether Corporate America can continue to be the key driver of economic growth.

The household balance sheet:

Household debt:

Non-financial business debt - will the SAAR increase sustain?

Government debt - slowest rate of increase in 3 years

And the ongoing drop in household real estate assets: