The United States Flow of Funds Accounts and Their Uses

Federal Reserve Bulletin, July, 2001 by Albert M. Teplin

Each day, a wealth of data on household, corporate, and government finances becomes available. The greatest challenge posed by these data is in interpreting the information they contain--that is, in evaluating the information's import in a historical context and determining its usefulness and appropriate weight in forecasting the direction of the U.S. economy. By assembling much of this information into a comprehensive, coherent data set, the U.S. flow of funds accounts produced at the Federal Reserve Board provide a framework in which incoming economic and financial data can be viewed.

In simple terms, the flow of funds accounts measure financial flows across sectors of the economy, tracking funds as they move from those sectors that serve as sources of capital, through intermediaries (such as banks, mutual funds, and pension funds), to sectors that use the capital to acquire physical and financial assets. With data extending back more than half a century, the accounts provide a broadly consistent set of time-series data for measuring financial flows in the economy.

The accounts are useful in documenting central economic trends. They show, for example, the growth of debt for each sector; changes in the sources of credit to households, businesses, and governments; and the development of new financial instruments for providing credit. They document the growth of important economic institutions, such as mutual funds and defined contribution pension plans, and show how these institutions have become woven into the financial fabric of the economy.

Data in the accounts are critical for understanding macroeconomic behavior. They have, for example, been used in recent studies of the wealth effect--the effect of changes in households' net worth on their decisions about saving and consumption. The accounts provide the commonly used time-series measure of overall household wealth, give detail on the composition of that wealth, and shed light on the factors underlying changes in composition, such as increases in the value of equity shares. In related analyses, the accounts have been used to study personal saving. They show how saving is allocated across broad classes of financial and tangible assets and provide alternative measures of personal saving that can be analyzed in conjunction with the measure commonly reported in the national income and product accounts compiled by the Department of Commerce. The accounts have also been used in analyses of business investment and of the implications of business sector leverage for the macroeconomy.

The accounts are used for monetary policy purposes. An economic forecast that integrates the flow of funds accounts with other macroeconomic accounts provides an opportunity to quantify the effects of likely changes in credit conditions on the growth of real activity. A flow of funds forecast also adds a check on the consistency of other elements of an economic forecast, because balance sheet conditions and access to credit and other external funds can be factors underlying the spending and production decisions of households, businesses, and governments.

The comprehensive framework of the flow of funds accounts is useful for interpreting current economic data.(1) As fragments of information on financial flows become available, they can be evaluated in light of the expectations embedded in the broader flow of funds forecast. Such evaluations may be especially helpful in interpreting the implications of higher frequency data on segments of the financial markets, such as particular types of financial intermediaries or financial instruments.

This article gives a brief overview of the flow of funds accounts and their uses. The next section describes the accounts, offering new users a brief tour of their organization and manner of publication. The two subsequent sections illustrate the uses of the data in the accounts in interpreting the behavior of households and nonfinancial corporate businesses; each section begins with a review of the growth of debt within the sector and then moves to a discussion of the determinants of that growth and its implications for economic behavior.

OVERVIEW OF THE ACCOUNTS

The flow of funds accounts record the acquisition of tangible and financial assets (and the incurrence of liabilities) throughout the U.S. economy and document the sources of funds used to acquire those assets. They also measure the value of assets and liabilities at the end of each quarter.(2)

Organization

The accounts trace transactions in more than forty types of financial instruments, such as time and savings deposits, mortgages, corporate bonds, equity shares, mutual fund shares, and bank loans. By recording the net volume of transactions in these instruments, the accounts make it possible to analyze the development of the instruments over time as alternative or complementary vehicles for financing economic activity. They also provide a means of tracking the role of financial intermediaries, such as banks and pension funds, in transferring funds from sectors that have positive saving to those that borrow funds.