Consumer Debt Levels: An Historical Perspective

Many economists project a slow recovery from this recession, as consumer spending, which makes up more than two thirds of the economy, is not expected to rebound any time soon. On what basis are economists making these projections? Mounting job losses are a major reason why consumer spending is not expected to be strong, and serves as a risk to the economy going forward as we discussed here. Another reason is that consumers have started to reduce their debt levels (i.e. rather than spending, they are saving).

Last Friday, the Federal Reserve reported that consumer debt levels continued to fall in June. While this de-leveraging of the consumer has been occurring for several months, it still has a long way to go from a historical point of view. The following chart (click to enlarge) illustrates how consumer debt levels have evolved over the last 70 years:

Clearly, consumer debt levels are quite elevated in a historical context, despite the recent well-publicized reductions. This indicates that there could be more debt reductions in store, which would reduce the consumer's ability to spend.

Will consumer debt return to the levels that they were in the year 2000, when the last recession took place? Nobody really knows. But investors should ensure they are prepared for debts to continue to reduce, by owning companies with flexible cost structures.

Comments

[rjs999:]

Thanks for this work. Is the trend the similar when looking at debt as % of GDP or debt per capita adjusted for inflation?

Aug 14 08:14 AM

[Kup:]

Thanks for the chart. It may be a useful exercise to adjust this for inflation and population growth. Just factoring in inflation means the equivalent level of today's debt in 1945 only had to be 211 Billion, which is still high. Barring a mass exodus of people or deflation, it's hard for the slope to level off. The recent blip would be considerably more noteworthy with that adjustment.

Aug 14 08:29 AM

[chap08:]

For those who were interested in the more meaningful consumer debt / gdp, follow the link for a rough chart:

www.wolframalpha.com/i...

It tells the story of how we went from 7% in 1950 to 18% today.

Aug 14 09:57 AM

[Jiang Nan:]

The significance of this chart is the change in the trend, if sustain, consumption which was 70% of the GDP is likely to head lower. That is not good for future growth.

Looking back, another trend change point was 91-92, also a year of rather severe recession.

If as you say the consumers are deleveraging, stick to Wal-mart.

Aug 14 10:04 AM

[JPSmith:]

The graph is meaningless since it's not adjusted for inflation, or even for population growth -- U.S. population is over double what it was in 1945.

These adjustments wouldn't make it a flat line, but the uptrend would hardly be as dramatic as it looks.

Aug 14 12:39 PM

[Donald Ingram:]

Bottom line;
The average American is massively deleveraging.
These basic changes in consumer attitude tend to be long termed. Until this process has run its course, do not expect any recovery on the retail side of business. Which means the 'run on' effect to labour, manufacturing, real estate, etc. etc.

Aug 14 12:47 PM

[whidbey:]

Debt pay down is not a great threat since much of it will be done in bankruptcy, by agreement, or with concessions of some time. A fully adjusted chart would show that debt as exceeded incomes for some time, but consumers were not stopped.

It will qualitatively change the spending from mid to high grade sales to the lower level less costly goods, and yes it will lower spending levels overall, but less than this graph implies. Then comes the tax increases on working families. This will push the consumer back into a spending strike and strongly suggests that Congress will not let the whole tax cut expire. On second thought that might be too much to expect. Havoc is possible.

Aug 14 01:12 PM

[Carlos Lam:]

A graph plotting household debt versus GDP can be found at media.npr.org/blogs/gl...

Look like from '66 to '86, the ratio hovered just under 50%. Even if we assume a return to that 20-year trend, the consumer has a LONG way to go to deleverage.

Aug 14 03:34 PM

[Smarty_Pants:]

Secondary question would be how much of current GDP is actually nothing more than banks cooking the books?

What is the debt / GDP ratio when bogus GDP is removed from the picture?

Aug 14 11:14 PM

[enigmaman:]

Metlife recently posted a completed study of the American dream , very interesting because it indicates a complete change in the consumers attitude going forward. When you consider how the events of last decade, 1999 market, 911, 2008 market, housing collapse, current recessionary consequences its not hard to understand why there appears to be a complete attitude adjustment of the part of the consumer. They have shifted from " I want it all " to " Half a loaf is better then none" that is why for some to consider business as usual from the consumer is not in touch with reality.

Aug 15 09:34 AM

[Gregman2:]

Perhaps an even more profound theme that's buried here is the changing perception on the role of private debt. It used to be that debt was viewed as a necessary means to create wealth. That's changing, especially now that the public sector has inserted itself so dramatically into the institutions traditionally responsible for lending and mortgage securitization.

Aug 15 06:53 PM