On a seasonally adjusted basis, growth of federal government debt slowed to 10-3/4 percent at an annual rate in the second quarter from a 12 percent rate in the previous quarter. In the state and local government sector, debt expanded 4-1/2 percent at an annual rate last quarter, about half the first-quarter pace. Although growth of household debt slowed from the rapid pace of the previous quarter, it remained strong at an annual rate of 9-1/2 percent in the second quarter.

Mortgage debt expanded at a double-digit annual rate last quarter and consumer credit rose moderately. Debt of nonfinancial businesses grew at an annual rate of 4-1/2 percent in the second quarter, a bit slower than in the first quarter. Among the components of nonfinancial business borrowing, net issuance of corporate bonds was negligible in the second quarter, but commercial mortgage borrowing was sizable and on a seasonally adjusted basis, bank loans posted the first quarterly net increase since late-2000.

The seasonally adjusted level of domestic nonfinancial debt outstanding was just under $23.3 trillion at the end of the second quarter of 2004. Debt of nonfederal sectors was $19 trillion and federal debt held by the public was about $4.3 trillion.

Growth of Domestic Nonfinancial Debt¹
Percentage changes; quarterly data are seasonally adjusted annual rates

This publication presents the flow of funds accounts for 2004:Q2.

Data revisions and other changes. The statistics in the attached tables reflect the use of new or revised source data. Most significant revisions appear in recent quarters; however, new source information resulted in changes to data for earlier periods.

1. Seasonal factors for quarterly financial flows have been recalculated for the period 1994:Q1 onward. The factors were generated using the Statistics Canada X-12-ARIMA/88 seasonal adjustment program.

2. The statistics in this publication reflect the annual revisions to the national income and product accounts from 2001 forward released by the Department of Commerce on July 30, 2004, and subsequent information for 2004:Q2 released on August 27, 2004. The August 2004 issue of the Survey of Current Business details the major features of the annual revision of the national income and product accounts.

3. The state and local government sector (tables F.105 and L.105) was modified to include two additional asset categories, money market mutual funds and trade receivables. In addition, estimates for existing categories of assets were revised from 1998:Q3 forward. The new data are based on information from the Comprehensive Annual Financial Reports of states that hold a majority of the financial assets of all states and a sample of large cities.

4. Revisions to the rest of the world sector (tables F.107 and L.107) reflect new estimates of the balance of payments from the Department of Commerce for 1989 through 2003. The new estimates are detailed in the July 2004 issue of the Survey of Current Business.

5. The government-sponsored enterprises sector (tables F.125 and L.125) was modified to include an additional asset category, time and savings deposits. In addition, the sector has been revised from 1988:Q4 forward to include the Federal Agricultural Mortgage Corporation (Farmer Mac).

Explanatory notes for tables D.1, D.2, and D.3. Domestic debt comprises credit market funds borrowed by U.S. entities from both domestic and foreign sources, while foreign debt represents amounts borrowed by foreign financial and nonfinancial entities in U.S. markets only. Financial sectors consist of government-sponsored enterprises, agency- and GSE- backed mortgage pools, and private financial institutions. Credit market debt consists of debt securities, mortgages, bank loans, commercial paper, consumer credit, U.S. government loans, and other loans and advances; it excludes trade debt, loans for the purpose of carrying securities, and funds raised from equity sources.

Growth rates in table D.1 are calculated by dividing seasonally adjusted flows from table D.2 by seasonally adjusted levels at the end of the previous period from table D.3. Seasonally adjusted levels in flow of funds statistics are derived by carrying forward year-end levels by seasonally adjusted flows. Growth rates calculated from changes in unadjusted levels printed in table L.2 can differ from those in table D.1.

Relation of Flows to Outstandings. Estimates of financial assets and liabilities outstanding are linked to data on flows. However, figures on outstandings contain discontinuities or breaks in series that could affect analysis of particular relationships over time specifically, outstanding in the flow of funds accounts are related to the flows in the following way:

Outstanding t = Outstanding t-1+ Flow t+ Discontinuity t
where "t" is the time period.

Discontinuities result from changes in valuation, breaks in source data, and changes in definitions. For most series, the value of the discontinuity is zero for nearly all time periods. However, in a few instances, the discontinuity is nonzero for almost all time periods, or is quite large in a particular quarter, such as a period when there is a sharp increase or decrease in equity prices or a major break in source data.

The discontinuities in a series can distort estimated rates of growth in assets and liabilities between periods. In order to minimize these distortions, percentage changes in assets and liabilities in flow of funds releases should be calculated as:

Percentage change t = (Flow t / Outstanding t-1) * 100

Preliminary Estimates. Figures shown for the most recent quarter in these tables are based on preliminary and incomplete information. A summary list of the principal sources of information available when the latest quarter's data were compiled is provided in a table following this introduction. The distinction between "available" data and "missing" data is not between final

and preliminary versions of data, but rather between those source estimates that are fully ready when the latest quarterly publication is compiled and those that are not yet completed. However, the items that are shown as available are, in general, also preliminary in the sense that they are subject to revision by source agencies.

Margins of Uncertainty. Flow of funds statistics are subject to uncertainties resulting from measurement errors in source data, incompatibilities among data from different sources, potential revisions in both financial and nonfinancial series, and incomplete data in parts of the accounts. The size of these uncertainties cannot be quantified in precise statistical terms, but allowance for them is explicitly made throughout the accounts by the inclusion of "discrepancies" for various sectors and instrument types. A discrepancy for a sector is the difference between its measured sources of funds and its measured uses of funds. For an instrument category, a discrepancy is the difference between measured funds borrowed through the financial instrument and measured funds lent through that instrument. The size of such discrepancies relative to the main asset or liability components is one indication of the quality of source data, especially on an annual basis. Fo quarterly data, differences in seasonal adjustment procedures for financial and nonfinancial components of the accounts sometimes result in discrepancies that cancel in annual data.

Availability of Data. Flow of funds statistics are updated about ten weeks following the end of a quarter. This publication - the Z.1 release - is available from the Board's Publications Services. Flow of funds data are also available electronically through the Internet at the following location:

http://www.federalreserve.gov/releases/Z1

The Internet site also provides quarterly data beginning in 1952, organized in compressed files that correspond to the tables published in this release. There are files for quarterly data for seasonally adjusted flows, unadjusted flows, outstandings, balance sheets, and debt (tables D.1, D.2, and D.3).

A Guide to the Flow of Funds Accounts is available. The 1,200-page Guide, published in two volumes in January 2000, explains in detail how the U.S. financial accounts are prepared and the principles underlying the accounts. The Guide can be purchased for $20.00 from the Board's Publications Services. Publications Services accepts orders accompanied by checks as well as credit card orders.

The Internet site for this release at the location shown above contains a link to an order form for the Guide that can be mailed or faxed to Publications Services. In addition, the Internet site includes a link to the Guide's descriptions of the tables in the flow of funds accounts.

Subscription Information. The Federal Reserve Board charges for subscriptions to all statistical releases. Inquiries for releases should be directed to:

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