economy

So, Business Debt Just Exceeded Household Debt For The First Time In 28 Years

Draw your own conclusions.

If you’re in the camp that worries about corporate debt, the Fed provided some fodder for scary headlines on Thursday.

Data for the third quarter shows business debt grew by 5.7% during the period, versus just a 3.3% rise in household borrowing.

The result: Business debt has surpassed household debt for the first time in some 28 years (i.e., since 1991). Nonfinancial companies ended Q3 with $15.987 trillion in debt outstanding, while the figure for households stands at $15.986 trillion.

Is this a problem? Well, maybe. Corporate leverage doesn’t have to be a “bad” thing if the proceeds from debt issuance are being plowed into capex or R&D or are otherwise allocated to boost productive capacity or (gasp) improve the plight of workers.

But in the post-crisis world, corporates have been incentivized by record-low borrowing costs and the so-called “tyranny of the next earnings report” to leverage the balance sheet in pursuit of artificially-inflated bottom lines.

In other words, management has been keen to take advantage of favorable market conditions (i.e., low rates and the insatiable hunt for yield among investors) by borrowing to fund buybacks, which in turn boost EPS, share prices and, ultimately, executive-linked compensation.

And please, spare us the protestations and accusations of shoddy reporting that you might level against other sites. We’ve spilled gallons of digital ink in these pages defending share repurchases and explaining why the above blanket criticism doesn’t tell the whole story (see here, for example). In other words, we’ve put in our time when it comes to giving both sides of this debate a fair shake.

The worry right now is that business investment is slowing despite elevated corporate leverage.

“While business investment has historically climbed when borrowing rose, companies now are increasingly using that credit to return money to investors”, Bloomberg noted on Thursday, reminding you that business investment has fallen for two straight quarters (blue below).

Draw your own conclusions.


 

2 comments on “So, Business Debt Just Exceeded Household Debt For The First Time In 28 Years

  1. Mr H–

    any charts on corporate leverage vs business spending in the past? The assumption is that ‘good’ lverage goes to support business investment…but when it doesnt, it doesnt necessarily mean something bad is Imminent. Free cash flow to leverage….but were in an era of very low rates…so maybe really FCF vs interest expense in aggregate might paint a better picture.

  2. Some $52-53Tn of debt from US Govt, Biz and Consumers. Add in states, underfunded pensions, future govt deficits, etc. All time high corp margins, slowing population growth, near full employment.

    What, me worry?

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