Economic warning signal: US Business debt exceeds that of households

Debt trends are starting to show worrying signs. Photo / Getty Images

U.S. business debt exceeded that of households for the first time since 1991, a potential warning sign for the economy as corporate investment softens.

Nonfinancial companies boosted debt at a faster 5.7 per cent annual pace in the third quarter to a total outstanding US$15.987 trillion (NZ$24 trillion), while household borrowing slowed to a 3.3 per cent rise to reach US$15.986 trillion, Federal Reserve data showed Thursday. Federal government debt climbed 10.4 per cent, the most since early 2018, to US$18.9 trillion.

With the record-long expansion in its 11th year, Fed policymakers have indicated in recent months that they're watching the corporate debt situation closely. Chairman Jerome Powell said in October that "leverage among corporations and other forms of business, private businesses, is historically high. We've been monitoring it carefully and taking appropriate steps."

Powell also said at the time that "in the aggregate, the household sector is in a very good place."

Corporate debt has ballooned with business investment declining for two straight quarters. While business investment has historically climbed when borrowing rose, companies now are increasingly using that credit to return money to investors.

The Fed data also showed net worth for households and non-profit groups increased US$573.6 billion, or 0.5 per cent, to US$113.8 trillion after a 1.7 per cent gain in the prior period.

US stocks rose at a slower pace in the third quarter as threats of additional tariffs on China followed by more upbeat trade news whipsawed investors. Households' holdings of real estate, a key source of wealth, rose to US$32.9 trillion in the third quarter from US$32.7 trillion as low mortgage rates, steady demand and an inventory squeeze continued to push up home values.

The value of equities directly and indirectly held by households and nonprofit groups eased to US$30.3 trillion from US$30.5 trillion in the prior quarter.

Consumer credit expanded an annualised 5.1 per cent in the third quarter, while mortgage debt increased at a 2.7 per cent pace.

- Bloomberg