Economic Report of the President

categories gradually abated through the first quarter of 1980. As reportedearlier, the credit controls program induced consumers toreduce their installment debt sharply in the second quarter, and theirrate of mortgage borrowing nearly halved. Even with some recoveryof borrowing in the third quarter, required household debt repaymentsas a percent of disposable personal income continued to fallthroughout 1980. At year-end this measure of household debt burdenswas well below the mid-1979 peak. Moreover, real financial networth per capita rose over the year. Taken together, these trendssuggest that the household debt burden may not be as serious a constrainton consumer spending in 1981 as it was in late 1979 and1980.Borrowing by nonfinancial businesses followed a pattern similar tothat of the household sector, though not as severe. Second quarterborrowing fell much more sharply than the decline in the financinggap (the excess of capital expenditures, including inventory accumulation,over internally generated funds), as businesses liquidatedsome of the short-term assets built up over the previous 3 quarters.In the third quarter businesses once again began to increase theirliquid asset portfolios, and corporate borrowing increased despite afurther reduction in the financing gap. Corporations took advantageof the precipitous drop in long-term rates in May and June by issuinga record volume of long-term bonds, but when long-term ratesmoved upward later in the summer they returned to short-termcredit expansion to meet their financing needs.The liquidity positions of nonfinancial corporations have deterioratedsignificantly since 1976, when the ratios of liquid assets andlong-term debt to short-term debt reached their cyclical highs. By theend of the second quarter of 1980 the corporate liquidity ratio(liquid assets relative to short-term debt) had reached an all-timelow, and long-term debt as a percent of total debt was considerablylower than the previous low reached in early 1975. Historically, businesseshave tended to restore their liquidity and move to a healthierbalance in their liability structures near the end of recessions, whenreduced credit needs and lower long-term rates allow them to liquidatetheir short-term borrowing and extend the maturity of their liabilitystructure. This time, however, the sharper-than-usual increasesin interest rates have attenuated this normal restructuring processand threaten to induce further deterioration of the financial health ofcorporations in 1981.164