The Federal Reserve released it's quarterly flow of funds data and, well, in three years of looking at these reports I've never quite seen anything like it.
Let's start by examining who was borrowing and lending in the second quarter. On the borrowing side, total borrowing more than doubled during the quarter, from a $1.2 trillion to a $2.5 trillion annual rate. The federal government was responsible for a big chunk of this. The Feds upped their annual borrowing rate from $79.9 billion to $882.2 billion in the quarter. Consumers upped their annual borrowing from $837.2 billion to a tad over $1 trillion, a faster rate of growth than the record set all of last year. Corporate borrowing is back, with nonfinancial corporate business borrowing at at a $311.5 billion rate versus $134.2 billion in the past quarter and zero in third quarter of 2002.
In a rather startling change, the financial sector actually is borrowing less, reducing their rate to $871.8 billion versus $1.003 trillion in the first quarter and $1.1 trillion in the fourth quarter 2002. Of those entities, the big three structured finance operators: GSE's, Federally sponsored mortgage pools and ABS issuers decreased borrowing slightly from $767.2 billion to $747.1 billion. Finance companies increased their borrowing from zero to $153.8 billion (this is mostly GMAC and other auto finance). Brokers and dealers decreased their borrowing from $38.4 billion to -$16.2 billion. Savings institutions dropped their borrowing from $48 billion to -$30.3 billion. Funding corporations reduced their borrowing from $48 billion to -$83.6 billion.
Continue the flow of funds analysis at thehotseat.
The Economic Policy Institute has a Jobs Watch site tracking the President's economic initiatives. Bush's Council of Economic Advisors pledged that his stimulus package passed in July would create 5.5 million jobs by the end of 2004. Based on the August numbers released last week, the plan is already short of that goal by 437,000.
First, the good news. Both Paul Kasriel's team and Steven Roach see positive growth in consumer spending and investment for the third quarter. Roach's models sees consumer spending growth coming in at a 5% annual clip and disposable income at a 8-9% annual clip. Kasriel sees GDP growth of 4 1/2 to 5% in the third quarter, mainly driven by durables spending and a renewal of capital spending. I find that number hard to agree with, given the dropoff in defense spending growth and an increase in our trade deficit that usually accompanies this kind of consumption driven growth (Europe is officially in recession). But I could be persuaded that 3% growth is achievable, though not sustainable.
We still have at least half the quarter to go, as August data is only preliminary and September is only starting, but it seems the tax bill and the latest interest rate cuts have sustained spending for a little longer the same way they have in the past, by sending consumers deeper into debt. Consumers borrowed another $6 billion in July, not surprising since the spigot for home equity extraction has nearly been closed off.
Continue reading "Fools Rush Back" over at thehotseat.