The Financial Fragility Indicator climbed to -1.83 in the last quarter of 2021, weaker than in the previous quarter where it fell to a 34-year record low of -2.08 (see chart 1). Higher financial fragility came from weakness in both the household sector and the non-financial corporate sector. By type of risks, leverage risks and liquidity risks for non-financial corporates all increased. For households, signals were mixed for indicators of leverage risks and liquidity risks, but the weighted average of individual indicators pointed to worsening financial conditions, with the household fragility index ticking higher. That said, while financial conditions have weakened, both household and non-financial corporate indicators remain, on average, well below their historic averages, indicating relative healthy balance sheets.
Chart 1
Non-Financial Corporates: Liquidity Conditions Worsened And Leverage Risks Up
The Financial Fragility Indicator for non-financial corporates increased to -1.47 in the fourth quarter of 2021, from -1.79 in the previous quarter (see chart 2). Nevertheless, the indicator is still at its lowest (healthiest) since the second quarter of 2011, and compared with a historical mean of zero, the overall conditions of corporate balance sheets are still healthy.
All individual indicators delivered a consistent message that both liquidity risks and leverage risks increased at the end of 2021, although the changes were relatively small. As for liquidity, the year-over-year growth rates of liquid asset to short-term liability ratio declined while short-term debt as a percentage of total debt slightly increased, pointing to higher liquidity stress. For leverage, the year-over-year growth rates of net debt to EBIT ratio and debt to asset ratio both increased, while the interest coverage ratio decreased, indicating slightly higher indebtedness.
Chart 2
Households: Financial Risks Edged Up But Still Historically Low
Financial Fragility Indicator for households edged up to -2.19 in the fourth quarter of 2021 from -2.36 in the previous quarter, increasing for two consecutive quarters from its all-time low of -2.41 in the second quarter of 2021 but still extremely low (see chart 3). The financial fragility of households on average remains historically low, indicating healthy balance sheets, reflecting a combination of generous pandemic check rebates and a subsequent hot labor market.
Individual balance sheet indicators sent mixed signals, with the overall assessment on household balance sheets worsening slightly in the fourth quarter. Lower year-over-year growth rates of debt service ratio and debt to disposable personal income ratio illustrated an alleviation of leverage risks, while the other five indicators we tracked signaled worsening liquidity, leverage, and net worth: the year-over-year growth rates of loan-to-value ratio and the charge-off rates on consumer loans went up, while those of liquid assets to short-term liabilities, short-term debt as a percentage of total debt, and the net worth to debt ratio all went down. Despite net worth reaching a record high in the fourth quarter, debt levels climbed at a slightly higher pace, weakening the net worth-to-debt ratio in the fourth quarter.
Chart 3
More On The Indicator
The Financial Fragility Indicator is a weighted average of indicators that reflect the financial fragility of corporates and households from different perspectives. We use principal component analysis to construct the indicator. The Financial Fragility Indicator includes not only the individual indicators at present but also their recent history to account for the possibility that financial risk may take time to mature and affect the economy. Zero represents sector financial vulnerability at historical average levels; positive values indicate higher vulnerability compared with history while negative values indicate lower than historical average vulnerability. For more information on our methodology for constructing the financial fragility index, see "Economic Research: The Financial Fragility Of U.S. Households And Businesses Hit A Decade Low In The First Quarter," published July 30, 2021.
This report does not constitute a rating action.
| U.S. Chief Economist: | Beth Ann Bovino, New York + 1 (212) 438 1652; bethann.bovino@spglobal.com |
| Contributors: | Shuyang Wu, Beijing |
| Joseph Arthur |
No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.