If businesses are indeed beginning to back away from
Nonfinancial corporations were responsible for the vast majority of increases in checking deposits in the second half of last year while households pulled money out of the system, according to data from the Federal Reserve (see charts).
Despite low interest rates, households poured large amounts into time and savings deposits in the fourth quarter. But even though households account for most time and savings balances — about 74% at the end of last year — inflows into such accounts were stronger from corporations overall in the second half.
(Noncorporate businesses, which drew down deposit balances generally last year — perhaps reflecting the poor relative health of small businesses and real estate partnerships — have held the largest share of checking deposits and currency — about 23% at the end of 2009.)
But despite the recent importance of corporations, the Fed data shows that flows from different categories of depositors can be highly volatile from period to period, with one sector propping up balances when another drains its claims. (Among financial entities, the government-sponsored enterprises added heavily to checking deposits in the second half of last year, and money market mutual funds built up holdings substantially in both checking and time and savings deposits.)
Moreover, though powerful forces sustained deposit growth during the downturn, including a flight away from riskier instruments, deposits in the long term have generally grown in tandem with loans. In part, banks are willing to pay higher rates to fund growing loan portfolios. Also, the act of lending injects more money into the system, and an economic expansion fuels increases in deposit balances.
Still, the gap between year-over-year growth in deposits and loans was wider, at 14.4 percentage points, in the fourth quarter than in more than three decades, and deposit growth appears likely to come under increasing pressure if savers keep shedding their wariness.
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