Consumer Deleveraging

Dramatic things are happening with consumer credit. The following graph from the 5-Min. Forecast (here) shows the decline in consumer credit over the past twelve months. The decline was modest from July, 2008 to February, 2009 and has accelerated since.

The following graph, from the same post, shows the significant difference in this recession compared to the two previous. In the 1991 recession, credit outstanding remained quite constant. For the 2001 recession, consumers appear to have taken Pres. Bush's advice to heart and ran their credit cards right through the recession. This recession is much different.

From 2001 to 2008, the increase in consumer credit each year was adding about 0.8% to 1% to GDP (assuming the new credit was spent on products and services). Since the average GDP growth during this time was just under 2.2%, increasing consumer credit was accounting for 36% to 45% of GDP growth for the eight year span.

In 2009, we have (so far) lost that 0.8% boost to GDP and have subtracted another 0.8%. If consumer credit were to drop no further, the numbers would remain as is. If the current decline in consumer credit continues to year end, the reduction in GDP from this source alone would by about 1.2%

So, just to replace reduced consumer credit, about $150-$160 billion in stimulus would have to find it's way into the economy. And to also reinstitute the growth in consumer credit that has been a mainstay of our economy, about $300 billion would have to get into the economy in 2009. Since the tax reduction parts of the stimulus are no doubt contributing to the reduction in consumer credit, most of the $300 billion will have to come from other parts of the package. That amount of stimulus is not being applied in 2009. The bulk of the construction stimulus is being spent in 2010. See here. About $35 billion will be spent in 2009, $57 billion in 2010, with the rest trailing out to 2012-13.

There has to be a terrific turnaround to get the 3% GDP predicted for the third quarter. To get it from the consumer, will require consumer credit to grow by about $90 billion. That can be reduced by approximately $15-$16 billion in government construction stimulus rolling out in this quarter. Subtract $4 billion more for cash for clunkers and that leaves about $70 billion on the shoulders of the consumer. Even if you say that part of the $70 billion can come from inventory replenishment that would start if the consumer started running up credit again, I have a hard time making the numbers add up.

How is the consumer going to turn around on a dime from a multi-month credit contraction of $20 billion per month to a two month expansion of credit by $20-$35 billion per month? Are we going to increase sales of new homes by $70 billion in August and September? That would be an increase of about 30% over the rate of sales in the second quarter. I don't see that happening.

Can anybody help me here?

Comments

[NUCLEAR1929:]

consumer is not deleveraging, he is forced to deleverage

Sep 10 10:54 AM

[Zmartmoney:]

I am very convinced that we're in that realm. Those who still do have jobs can see all the same things that we're seeing in the article. That means that they know that their job is just as endangered if the blood-letting worsens. No one is immune and everyone with any sense knows it. That means you're trying to put money aside (not necessarily into the banking system), not generate new debt (which reduces survival potential if it gets uglier...it will). A Bernanke "helipcopter drop" would disappear into debt everywhere it landed, buying down overhead for self preservation.


On Sep 10 09:28 AM David Van Knapp wrote:

> I struggle to understand the permanence of the deleveraging. The
> numbers certainly bear out that there's lots of deleveraging right
> now, but I do not sense anywhere near the "fear of debt" that I saw in my parents and the generation that lived through the Great Depression.
> I do see, as Wrixon pointed out above, a forced frugality at the
> moment, but whether that is permanent is another question entirely.
> That gets into cultural attitudes and generational shifts in behavior.
> I'm not convinced we're into that realm.
>

Sep 10 10:56 AM

[John Lounsbury:]

David Van K - - -

Good comment. You point out what many fail to recognize: there are local aspects of economies that can be quite different from national averages.

I did not attempt to address the permanency (or lack of) for deleveraging. I was simply trying to make the numbers work for the rest of the third quarter. That's about three weeks now - hardly the framework for a discussion of permanency. I agree with you that a totally new paradigm on the use of credit is not likely. However, we have to get employment on a better footing before the new normal can be established.

With respect to your comment about a ten year depression in Rochester, the entire country would have been in a depression since 2001 had it not been for exploding consumer credit, home equity extraction, and the bubble in useless but profitable credit instruments. I'm working on an article describing this.

Victor84 - - -

I think you are overly optimistic when you say: "Jobs are stabilizing albeit not improving." My detailed analysis says the job situation is not deteriorating as rapidly, but that a bottom in job loss is not yet indicated. An article discussing this is
www.thestreet.com/stor...

Fran - - -

I am a very hopeful person. However, data keeps getting in the way. I like the analogy to trust: Trust but verify. With hope, keep it burning but check the data.

basehitz - - -

Very complete comment. It ties in to what I am working on. (See end on comment to David Van K above.)

David Wrixon - - -

You are correct (about the double edged sword). But can you grant me the concession that the topic was really outside the narrow objective of the article (trying to rationalize how September can save a 3% GDP quarter)?

Madduckk - - -

I assume your 500,000 refers to weekly initial unemployment claims. If that stays above 500,000 through the end of 2010, the economy will be doing much more poorly than I expect. If your projection is realized, unemployment (U-3) will be in the 13-14% range and my unemployment measurement based on a 40 hour work week will reach 20%. You are describing a depression.

Clive - - -

I keep finding so many data points that are different from previous recessions since World War II. Trying to determine what is significant is the big problem.

Thanks for commenting.

Sep 10 11:33 AM

[mkreisel:]

If the demand is so weak, why not print more money (not borrowing anymore) and give everybody a raise?

If the dollar suffers as a consequence, so be it! Let's just make the stuffs here instead of in China.

Sep 10 12:46 PM

[The Geoffster:]

"The only reason a great many American families don’t own an elephant is that they have never been offered an elephant for a dollar down and easy weekly payments."
- Mad Magazine

Sep 10 01:24 PM

[fran:]

tuck your response away for 10 years. at that time read it and write an update. it will be a shame WE can't participate in the review.
have you visited your local state/county unemployment claims dept recently?? spend a day each week there if you wish to see your location reality.
your state[ny] is bankrupt. what of your county or town/city? include a realistic look at local gov't and teacher retirement and medical future commitments? i'll bet your parents never faced those unfunded liabilities. if you've time, we could dig into your piece of the federal unfunded liability for SSA and MEDICARE/MEDICAID.

IT IS ALL ON CREDIT MY NYS CITIZEN COMPANION.


On Sep 10 09:28 AM David Van Knapp wrote:

> I struggle to understand the permanence of the deleveraging. The
> numbers certainly bear out that there's lots of deleveraging right
> now, but I do not sense anywhere near the "fear of debt" that I saw
> in my parents and the generation that lived through the Great Depression.
> I do see, as Wrixon pointed out above, a forced frugality at the
> moment, but whether that is permanent is another question entirely.
> That gets into cultural attitudes and generational shifts in behavior.
> I'm not convinced we're into that realm.
>
> It is just as wrong to project current deleveraging trends infinitely
> into the future as it was to project rising home prices infinitely
> into the future (which led to the housing bubble) or to irrationally
> overestimate technology's growth infinitely into the future (which
> led to the tech bubble).
>
> I live near Rochester NY. This area has been in a local recession
> for more than a decade. Around here, not much changes very fast.
> We never participated in the housing bubble, and are not participating
> very much in the housing bust. Home sales are down YoY, but prices
> have held steady. I don't know anybody who has lost their home and
> only a couple who have lost their jobs. That all took place years
> ago. The average age of people here is higher...younger people tend
> to leave to seek their fortunes elsewhere. So maybe we are living
> the "new normal" right here, right now...modest home price increases
> (<3% per year), modest spending, etc.
>
> But even here, I don't sense a cultural shift to permanent deleveraging.
> Thrift, yes, but around here that's been the rule for a decade. Meanwhile,
> iPhones still fly out of stores, teenagers still get cars, Wegmans
> is mobbed. Bottom line is slow growth and far less economic volatility
> during boom-bust cycles in the general economy. Perhaps this is a
> model for what is going to happen nationwide as we pull out of the
> current recession with high unemployment, still too much debt, massive
> government deficits, an aging population, etc. That is, there will
> be a slow, relentless adjustment to the new realities, but as time
> goes on, people will get jobs back, GDP will start to grow slowly,
> home prices will bottom out and then start to rise slowly and sensibly,
> and so on.

Sep 10 01:48 PM

[fran:]

JOHN L--

trust and verify?
that was needed action last year. what is your recommended action for your readers for the upcomming mid term elections?

Sep 10 01:56 PM

[John Lounsbury:]

There was an article in the Financial Times today that argued that consumer deleveraging was not as big a problem as it might seem at first glance. I have written another article discussing that point of view posted on my Instablog seekingalpha.com/insta...

Nothing in that discussion had bearing on my concern about third quarter GDP, but it does have a good longer term view. In fact some factors are discussed extending all the way to 2015.

Sep 10 02:08 PM

[Donald Ingram:]

The 'old' consumer is gone. They won't be back. The 'new' consumer is practising thrift and frugality.
The people have been badly financially burned. Hard learned lesson.
These 'new' traits showing up as can be seen in saving/deleveraging stats, tend to be long termed behaviors. Generationally long. Just look at the generation that went through the crucible of the Great Depression, their behaviors were changed for the rest of their lives. Always putting something away for a rainy day. We can all remember a grandparent or great-grandparent that practiced these behaviors.
A significantly large portion of the present populace will remember getting "burned" and will not allow that to happen to them again. Once burned - twice shy! This 'new' consumer is going to be the new reality going forward. Get used to it!

Sep 10 02:11 PM

[John Lounsbury:]

fran - - -

I have some personal political feelings, but do my best to separate them from my economic analysis. I try to deal with numbers and facts. I can not relate them to political factors, which, unfortunately, are driven by emotions, often at the denial of facts. I have written before (I apologize if it an old comment for you) that I prefer to deal in the realm of ideas and not in the venue of ideology. I have found many instances when ideologies of two opposing extremes both seem to be in conflict with what I have determined to be facts.

For politicians, facts are sometimes inconvenient truths. I just can't play that game.

Sep 10 02:15 PM

[thiazole:]

As I understand it, stimulus spending was supposed to amount to $70 billion in the 3rd quarter. Is this no longer true? That alone is between 2 and 3% of the total GDP for a quarter. Assuming I'm correct there, getting to 3% should be child's play.

Sep 10 04:08 PM

[John Lounsbury:]

thiazole - - -

The spending rollout data that I am looking at is in this post
seekingalpha.com/insta...
The number you are looking at may include tax cuts. So far, the bulk of the tax cuts have gone to debt reduction. The argument I tried to make is that debt reduction must stop and the money be spent instead, with increased use of credit as well, to get to 3% GDP growth in the third quarter. I still think that is an argument and not a fact. I'm still looking for a way to get some facts.

I appreciate your suggestion, but for the reasons I mentioned above, I don't think you have the answer (unless, of course, the dbet reduction vs spending pattern through the end of August changes drastically.

Goldman Sach analysts think debt reduction will continue through 2015. I cited that post above. Here it is again: seekingalpha.com/insta...

Sep 10 06:18 PM

[John Lounsbury:]

Sorry about the last link: seekingalpha.com/insta...

Sep 10 06:21 PM

[Zak J:]

Donald, people coming out of the Great Depression era had more scruples than the spoil populous that roams today. I agree that many will learn from the burn. But, I have little confidence in the majority of the masses that created the problem. The lack of reasoning and ethics, let alone memory, will draw the bugs to the light when barriers, put in place by the powers that be, erode away. Right now there is a lot of oversight and intervention, (credit limits are cut, extensions, bail outs prescribed) but as soon as these barriers are let up the masses will continue to take what they can get away without care for consequences down the road -again.

It is as typical as the situation that is created by parents continually bailing their kids out of trouble. Sure the kids feel some initial burn from their action. But the guilt blows away with the breeze and before you know it…..



On Sep 10 02:11 PM Donald Ingram wrote:

> The 'old' consumer is gone. They won't be back. The 'new' consumer
> is practising thrift and frugality.
> The people have been badly financially burned. Hard learned lesson.
>
> These 'new' traits showing up as can be seen in saving/deleveraging
> stats, tend to be long termed behaviors. Generationally long. Just
> look at the generation that went through the crucible of the Great
> Depression, their behaviors were changed for the rest of their lives.
> Always putting something away for a rainy day. We can all remember
> a grandparent or great-grandparent that practiced these behaviors.
>
> A significantly large portion of the present populace will remember
> getting "burned" and will not allow that to happen to them again.
> Once burned - twice shy! This 'new' consumer is going to be the new
> reality going forward. Get used to it!

Sep 10 07:30 PM

[Steven Hansen:]

John,
"How is the consumer going to turn around on a dime from a multi-month credit contraction of $20 billion per month to a two month expansion of credit by $20-$35 billion per month?"

I would say great minds think alike in this topical discussion. My post this weekend addresses this issue with the usual smoke and mirrors of economic wizardry.

The points you make are excellent, and this is exactly what headwinds our recovery must overcome. Another great post.

Sep 11 12:34 AM

[John Lounsbury:]

Steve - - -

Thanks. See my post seekingalpha.com/insta... about the same consumer credit contraction extrapolated out to 2015. Analysts at Goldman argue that, although declining consumer credit will be a GDP drag for six more years (with about the same GDP impact as I estimated for the current year), they see factors in the third quarter that will overcome the drag. I discuss why I question their assumptions. Considering our relative compensation levels, they are probably right. I just can't make the numbers add up yet.

Sep 11 12:41 AM

[Sober Realist:]

And where will the jobs come from to pay the debt and consume. Look at this chart and see another big problem:
www.oftwominds.com/pho...

Sep 11 01:06 AM

[H. T. Love:]

That's a scary chart! Maybe it'll make those drunkards in D.C. stop drinking and they'll become a "Sober Realist" too! ;-))

NAH! They'd never do that.

Anyway, one heartening thing is the reported drop in consumer debt of $21.5B when economists expected $4B.

So in spite of the desires of the polity et al, the consumer is doing (by choice or force) what is good long-term for themselves and the country.

HardToLove


On Sep 11 01:06 AM Sober Realist wrote:

> And where will the jobs come from to pay the debt and consume. Look
> at this chart and see another big problem:
> www.oftwominds.com/pho...

Sep 11 05:37 AM

[H. T. Love:]

So will many drugs, and the effect, long-term, is probably the same.

HardToLove

On Sep 10 10:33 AM fran wrote:

> <snip>
> ... stop looking at reality. focus on the CHARISMA,
> it will make the pain go away.

Sep 11 05:48 AM

[Carlos Lam:]

On Sep 10 09:28 AM David Van Knapp wrote:

> I struggle to understand the permanence of the deleveraging. The
> numbers certainly bear out that there's lots of deleveraging right
> now, but I do not sense anywhere near the "fear of debt" that I saw
> in my parents and the generation that lived through the Great Depression.

We will only see monumental cultural changes re: debt in hindsight, of course. One curious indicator that I've seen is that there are now multiple gurus -- not just Dave Ramsey -- advocating a debt-free life, a prospect I would've thought impossible just a few years ago.

Sep 11 06:46 AM