Thursday, January 08, 2009

Debt-Financed Consumer Spending Spree?


From the Wall Street Journal article "Hard-Hit Families Finally Start Saving, Aggravating Nation's Economic Woes":

Rick and Noreen Capp recently reduced their credit-card debt, opened a savings account and stopped taking their two children to restaurants. Jessica and Alan Muir have started buying children's clothes at steep markdowns, splitting bulk-food purchases with other families and gathering their firewood instead of buying it for $200 a cord.

As layoffs and store closures grip Boise, these two local families hope their newfound frugality will see them through the economic downturn. But this same thriftiness, embraced by families across the U.S., is also a major reason the downturn may not soon end. Americans, fresh off a decadeslong buying spree, are finally saving more and spending less -- just as the economy needs their dollars the most.

MP: The "decadeslong buying spree" reported by the WSJ seems to be a commonly held belief; do a Google News Search of "consumer spending spree" and you get 600 results, and for "credit card nation" you get almost 400 results.

But the consumer debt data from the Federal Reserve suggest a slightly different story than the one reported by the media. The top chart above shows consumer credit outstanding as a percentage of GDP, which peaked in mid-2003 at 18.7%, and then declined a full percentage point by mid-2007 to 17.7% before increasing slightly to 17.9% by the third quarter of 2008. And 1% of GDP is a lot, about $140 billion.

The bottom chart above shows the growth rate in total consumer credit, which is at the lowest level since the early 1990s, and has been falling steadily since 2001.

What's going on here? It's possible that "consumer credit" reported by the Fed does not include mortgage debt, and homeowners started using home equity loans instead of bank loans around 2002?

Comments welcome.

7 Comments:

At 1/08/2009 11:24 AM, Anonymous Anonymous said...

I may be the only person alive in this country that, even before all this recession stuff, saves money and has a budget. My life has changed 0 percent in the past year. (I actually found a better paying job for 2009.) I'm not going to alter my lifestyle because other people are losing their jobs. (Knock on wood that I keep mine!)

 
At 1/08/2009 11:32 AM, Anonymous EJ said...

MP,

You have to be careful with this data. The Fed data is only credit cards and other unsecured consumer loans. A lot of the consumption growth over the last decade was driven by home equity loans; people using there houses as ATM's. If you include the growth of HELOCs and HELs into the data, there is a much different picture. However, your point does hold true as far as the claims about "credit card nation" and the like.

 
At 1/08/2009 1:18 PM, Anonymous KCuz said...

MP,

Unless I misunderstand, isn't the difference in the types of charts. One is a percentage of GDP and the other is GROWTH rates?

In addition to perhaps not using Home Equity loans etc in the calculation, is it possible that these charts are telling us that we are reaching our limit in terms of credit?

Even if it's "just" credit card debt, this chart would tell me that we have been using up all available credit in the past decade and now we've reached our limit (thus the growth RATE being lower).

Just a thought.

Love the site

 
At 1/08/2009 2:02 PM, Blogger bobble said...

"It's possible that "consumer credit" reported by the Fed does not include mortgage debt, and homeowners started using home equity loans instead of bank loans around 2002?"

exactly.

"Active mortgage equity withdrawal reached a record high 5.4% of disposable personal income in 2005." see chart 6 in this detailed analysis of household spending.


for a slightly problematical, yet compelling view of mortgage equity withdrawal effect on GDP see this chart. be sure to read the article to understand what the chart is actually saying, and why it is problematical.

 
At 1/08/2009 2:51 PM, Anonymous Anonymous said...

The "Consumer Credit Outstanding, %GDP" chart may actually be overstating consumer credit.

Many people use credit cards instead of cash and pay their cards off every month.

Is this type of usage reflected in the charts?

 
At 1/08/2009 3:03 PM, Anonymous Anonymous said...

" ...this chart assumes that 50% of MEW flows to domestic consumption. It is possible that more or less is used to pay off debt, for investment purposes, or flows to imports." - Calculated Risk.

Many people used MEW to pay down higher interest, nondeductible credit card debt. This will happen again as people take advantage of lower mortgage rates to refinance.

 
At 1/10/2009 8:57 PM, Anonymous Anonymous said...

At first I thought this post was a joke. How can you not know the real story of the last decade was mortgage-related debt?

Look at mortgage debt

Look at household debt as a % of GDP

 

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