Will We See a 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.

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 almost 12,000 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.

Comments

[timoc:]

www.federalreserve.gov...
Is where you will see the full impact of credit including Home equity and mortgage on consumer ability to pay - note the uptick as credit payment minimums increased.
As credit card minimum payments are increased from 2% to 5% for many and as credit limits are reduced more disposable income is sucked out of the system - good luck for any consumer credit funded recovery- www.retailnetgroup.com...

Jan 08 12:35 PM

[Kevin Walmsley:]

I suspect that much of the new credit expansion--such as it even is--would come from households forced to borrow more because of job loss. But I don't know of any metric that would capture such a statistic, except perhaps future revolving debt delinquency because employment is hard to come by. And those are trending higher.
American households are retrenching, which is welcome news after decades of profligacy. Less welcome is our government's urge to rush into the vacuum, trying desperately to reflate the same bubbles that free markets are determined to pop.

Jan 08 05:08 PM

[Guero:]

Isn't it perverse how a re-trenching consumer is anathema to economic recovery? In order for our sorry service & consumer based economy to recover, we have to start charging it up again! Count me out.

Jan 08 05:18 PM

[Bankerbob:]

Household debt to gdp is not relevant. Need to compare household debt to personal income.

Jan 08 08:25 PM

[Greg Pinelli:]

I'm not sure what to make from the two charts and the articles except...
1. Debt is still very high...as a % of almost anything you choose..and if we choose Bankerbob's notion of debt to household income we ought to be scared as hell
2. The "new" credit expansion we'll see in the next 6 months will largely go towards repairing household balance sheets...There's going to be a constant drumbeat for small business loans and projects galore..
The next consumer spending frenzy will start in later 2009 (around Xmas...big surprise)..All that pent up denial will explode in a shopping binge..and almost certain record number of Mall sale homicides.

Jan 08 11:58 PM

[John Lounsbury:]

Mark Perry - - -

Definitions may vary, but the most common definition of consumer debt is credit card debt and similar items. Most definitions do not include capital debt, such as automobile loans and mortgages. I'm not sure where student loans fall in the definition spectrum.

Jan 09 12:18 AM

[ChipSeal:]

Wrong metric. Look at Mortgage Equity Withdrawals (MEW) over the past decade. That is where the consumer driven expansion came from.

From work done by James Kennedy and Alan Greenspan, on the effect of mortgage equity withdrawals (MEWs) on the growth of the US economy:

"MEWs contributed over 3% to GDP growth in 2004 and 2005, and 2% in 2006. Without US homeowners using their homes as an ATM, the economy would have been very sluggish indeed, averaging much less than 1% for the first six years of the Bush presidency."

Without MEWs, the period from 2001-2007 would have seen GDP growth of less than 1%!

Jan 09 10:14 AM

[secmaven:]

And what will the MEWS be going forward with the 25% and more decline in home values across the US? Counting on a consumer driven spending increase to restart the economy is a false hope. The US government must become the spender of last resort. That is Obama's plan.

Jan 09 12:05 PM

[calen:]

i think that americans have finally realized that living on the high hog, is not as it should be, we have bocome a nation of me, me, me, and now, and bigger is better, we have borrowed and borrowed until we puke, and now the ones that are suffering are the same stupid people that can not even count to ten. i say let the system become a merit system, if you work hard and persevere then you get to play, if you dont, then you get to live under a bridge. our economy has been over inflated and bloated by so much spending and waisting, that it is incredible, so good bye and good riddens, i have always prepared for this, i saw it comming many years ago and now am ready to ride for more than 20 years this mealstorm of chaos.

Jan 09 12:33 PM

[henarl:]

A lot of this living beyond your means can be attributed to the electronic media and Madison Ave. A half hour TV program has about ten minutes of advertising telling 20 & 30 somethings that they should have more and better material goodies than their parents waited until their 50s to obtain. It's "I want it all and I want it NOW" and the only way to get it is to borrow, borrow, borrow. Now that they've maxed out there are going to be a lot of unhappy X,Y, & Z generation folks out there. Well maybe you can move back in with Mommy & Daddy, cause the party's about over.

Jan 09 04:27 PM

[PacificGate...:]

MYTHS OF DEBT

Behavior modification requires acknowledging past mistakes.

What did we do for twenty years?
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pacificgatepost.blogsp...
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Now let’s get on with the correction.

Jan 10 03:44 AM