Consumer Debt & Spending
This week, the Federal Reserve reported that revolving consumer credit had risen 7.4% from the same period last year. Outstanding credit card debt hit $937.5 billion.
Floyd Norris notes the significance of the recent trends in credit card indebtedness:
"AMERICAN credit card debt is growing at the fastest rate in years, a fact that may signal coming trouble for the banks that issue them...
The annual growth rate has now been over 7 percent for three months running, the first such stretch since 2001, when a recession was driving up borrowing by hard-pressed consumers.
The surge in credit card borrowing comes as credit card default rates are gradually rising, albeit from low levels, and may reflect the fact that it has become harder for consumers to borrow against the value of their homes, both because home values have fallen in many markets and because mortgage lending standards have tightened."
The chart tells all:
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click for larger chart
graphic courtesy of NYT
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With that as our context, consider these two headlines:
Economy Hit As Consumers Tighten Belts (WSJ)
U.S. Will Escape Recession, Economists Say in Survey (Bloomberg)
While its possible they can both be right -- slowing consumer brings growth down to marginally positive, but not recessionary -- I have a sneaking suspicion they both won't be right.
Which one do you think will be correct . . . ?
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Recently:
How Good Were Holiday Sales Really? http://bigpicture.typepad.com/comments/2008/01/how-good-were-h.html
Real Holiday Spending Was Negative in 2007 http://bigpicture.typepad.com/comments/2007/12/holiday-spendin.html
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Sources:
Some Debt Trends Are Good. This Isn’t One of Them.
FLOYD NORRIS
NYT, January 12, 2008
http://www.nytimes.com/2008/01/12/business/12charts.html
Economy Hit As Consumers Tighten Belts
JUSTIN LAHART and KELLY EVANS
WSJ, January 12, 2008; Page A1
http://online.wsj.com/article/SB120009796448585205.html
U.S. Will Escape Recession, Economists Say in Survey
Shobhana Chandra and Alex Tanzi
Bloomberg, Jan. 9 2007
http://www.bloomberg.com/apps/news?pid=20601087&sid=aEX73qWiBrb4&
Saturday, January 12, 2008 | 09:46 AM | Permalink
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Comments
The dramatic decline in CC growth from 2001 (12%) to the 4% area from 02 thru 06 was not so much a function of better economic times but from mortgage refi activity. Take that away and perhaps 6+% becomes the norm. In other words, it is necessary to borrow more just to stay even. Consumption patterns will change.
Merchants that I talk to are generally an optimistic lot. They are frowning now when asked "how's business." The least pessimistic now respond "unusual."
Just a hunch, but we have been in a recession since August. If you adjust nominal GDP with REAL inflation data, we went negative then.
Posted by: Ross | Jan 12, 2008 12:15:25 PM
Credit card debt is up but consumer sales are down. Consumer debt service as a % of income has never been higher.
I didn't see much hope in the export numbers, unless you are a corn/soybean farmer in the midwest.
It looks like the "slow moving train wreck" has hit a downward slope and is picking up steam.
What is going to take the place of MEW discretionary income from here on out?
Posted by: bsneath | Jan 12, 2008 1:13:40 PM
Ross,
"Just a hunch, but we have been in a recession since August. If you adjust nominal GDP with REAL inflation data, we went negative then."
Oh ya, but I'll leave it to the official arbiter, the NBER, to sort out the month. Not to mention that several years back the NBER stated that their definition of "recession" was no longer just limited to two quarters of negative GDP. Whether they now have the guts to utilize that expanded definition is another matter.
.
Posted by: VJ | Jan 12, 2008 1:33:01 PM
Ross wrote,
"The dramatic decline in CC growth from 2001 (12%) to the 4% area from 02 thru 06 was not so much a function of better economic times but from mortgage refi activity."
This has been my view, as well - the dramatic growth in "bill-consolidation" loans both spurred the refinance activity as well as lowered outstanding credit card debt. All that was really accomplished was a respite - a few years of breathing room for the terminally indebted.
Debt-based consumption has a built in cap and that is solvency. When debt build-up rolls away from longer-term housing refinance back to short-term credit card debt, the solvency cap is more quickly reached.
The problem the Fed now faces is not a mad scramble for what it can provide - more liquidity, but a mad scramble for what it cannot provide - more capital.
Or to paraphase Ludwig Von Dylan: "The time-preferences they are a changin'".
Posted by: Winston Munn | Jan 12, 2008 1:36:47 PM
VJ, don't disagree with you. NBER (We're from the Government and these numbers are accurate.)
Some parts of any economy will be in recession at any given time. Perhaps we're beating a dead horse here. Maybe we start talking about a worldwide recession. I believe the Spanish, English are in the same boat with us. The former in housing and the latter in finance. Eastern Europe is going to be a mess in my opinion. Several friends there are starting to suck wind. I wonder if Jimmy Rogers will rent me a room! Better yet, he can adopt me!!!
Posted by: Ross | Jan 12, 2008 1:45:19 PM
Remember that significant changes to the Bankruptcy Laws have made it significantly more difficult for those in overwhelming revolving debt to obtain relief...
Posted by: SINGER | Jan 12, 2008 1:54:56 PM
The whole recession question seems so 2007 but I do agree things are bad and will likely get worse before getting better.
I'm more/most interested in what industries are going to be the RefiLenders, Homebuilders and Defense contractors of the coming year(s). Alternate energy seems one that will continue. Don't know how to invest in bankruptcy attorneys other than being one but they're surely in for boom times too.
Posted by: Bob A | Jan 12, 2008 2:10:44 PM
With tightening belts I suppose exporting American jobs to lower cost labor countries is also going to gain momentum despite what any politician might be saying.
Posted by: Bob A | Jan 12, 2008 2:13:28 PM
Read the Barron's roundtable for a view of the future- re recession. Both foreign participants are gloomy re the entire year while most of the Americans with the exception of Hickey, see a magical recovery in the second half. Methinks the desire to keep their 15% tax rate is driving their hopes and forecasts with a small dollop of reality.
Posted by: larry | Jan 12, 2008 2:23:25 PM
Second half recovery? When have I heard that? Oh yes, economists and permabulls predicted THREE of ZERO second half recoveries in 2000, 2001, and 2002. Mr. Cramer of thestreet.com was breathlessly predicting a second half recovery every single day of the 2000 - 2002 bear market.
Posted by: bt | Jan 12, 2008 2:41:03 PM
Methinks the squeeze may be here. That is, the squeeze between higher and higher taxes and an evaporating standard of living. The borrowers have been living in a fools paradise, thinking that we can give all this money away, pay for everything for everybody and still maintain the same standard of living. Tain't so, McGee.
Posted by: lcmslutheran | Jan 12, 2008 2:43:02 PM
Just goes to show that you can't last on either extreme, I guess. One the one hand you've got the average US household supposedly up to their eyeball in one kind of debt or another. We're told we need to "save more" (even though the "savings" #s never include equities holdings etc., I think) and at the same time the slightest dip in Holiday sales is a threat to a retailer's entire year profit-wise. Now the "subprime"/credit crisis is going to slam a country into recession where most of the S&P 500 company's profits are still quite healthy last time I checked.
On th other hand you have the Japanese who if anything, save too much, and they have been stuck in economic muck for about 15 years now and despite what must be booming exports to China and the rest of the Far East, appear to be sinking back into the muck after oh so brief a glimpse of economic daylight. It's a complex world out there!
Posted by: Mike G. | Jan 12, 2008 2:45:52 PM
"Outstanding credit card debt hit $937.5 billion."
I'd love to see more indepth data...for instance:
How much of that debt was used for services vs goods
How much went to health care related costs
How much is the result of cash advances used to pay other bills (non-health related)
How much is the result of high interest rates (20-25%) applied to those cash advances?
Posted by: FT Woods | Jan 12, 2008 2:56:27 PM
FT Woods, regarding breaking up the credit card debt data based on where it went to...
What information can you glean from such a break up? The bottomline is that the average consumer has X dollars to spend but spent (X + Y) by borrowing the Y dollars. The break out of the spending on credit cards can only give you valuable info if you also knew the breakup of the original X dollars, which consumers didn't have to borrow. What was charged to credit cards is probably largely based on convenience and timing of the payment relative to timing of other payments a consumer had to make.
Posted by: bt | Jan 12, 2008 3:19:17 PM
what about the FED giving every american
a credit card with 1% interest rates , and say
$100k credit line ??
That way, it ain't technically called printing money. Because the american is borrowing the money , not being given it by Bernanke ??
Posted by: rickrude | Jan 12, 2008 3:22:24 PM
rickrude, that is a swell idea. Only problem is your assumption that 1) the FED is interested in helping the little guy and 2) that the current debt woes will be solved by taking on even more debt.
Posted by: bt | Jan 12, 2008 3:27:51 PM
Why aren't any of these blow-hards that are running for president talking about this problem??? ... encouraging people to START SAVING instead of spending more than they make. These politicians love to discus the idea of me bailing out my foolish neighbor who's up to his eyeballs in debt, facing foreclosure.
We all need to step back, and examine just WTF has been going on here. You can't build a national, state, local or household economy, constantly spending more money than you make. Eventually the music stops.
Oh well -- what do I know. I'm another jaded citizen who doesn't vote.
Posted by: Donny | Jan 12, 2008 4:05:39 PM
Ron Paul has been talking about it for years. He schooled Benny a couple of times. Search Ron Paul on You Tube. I really enjoyed him in the debates. VERY bright on economics, extreme,..like get rid of the fed and go back to a gold standard extreme.
I'm definitely givng this guy a once over.
Posted by: ken h | Jan 12, 2008 5:03:55 PM
bt,
Credit cards as a "convenience" is exactly why there are debit cards. Consumers are opting instead for debt.
The reason I ask about health care costs as a percentage of credit card debt is 1/6 people in the US are now uninsured. If they can't afford the insurance, how are they paying for their care? Chances are good, they're paying with credit. Now, if it's only a small percentage of debt, well, then it doesn't matter. But I suspect it's not a small percentage, not at all.
Why is health care even an issue? "A study found that 50 percent of all bankruptcy filings were partly the result of medical expenses" - Illness and Injury as Contributors to Bankruptcy, Health Affairs, Feb 2005
If a significant amount of the cc debt being created is for health care costs -- let's say 20% or higher -- then economic stimulus MUST address health care. And yet, that's not what we're seeing in the news vis a vis proposals for stimulus packages.
What I'm trying to see clearly is the bigger picture and how seemingly unrelated issues may be contributing to current events.
Posted by: FT Woods | Jan 12, 2008 5:05:02 PM
FT Woods:
That's a pretty low bar you've set out to blame it on healtcare. "50% of all bankruptcy filings were partly the result of medical expenses".
Unless "partly" is found to actually be "primarily" or something through actual data then it doesn't carry a lot of weight. It's a safe bet that people declaring bankruptcy are behind on everything, and "everything" includes healthcare so I don't see how there is justification to single healthcare out as "the" problem. I'm not saying healthcare costs aren't a problem, I'm just trying to put it in perspective when it comes to bankruptcy.
Would a major medical problem like cancer or open heart surgery be a fatal fiscal blow to someone on the brink? Sure. As would losing their job, having their home burn down and any other expense that can't be put off.
Posted by: Mike G. | Jan 12, 2008 6:41:48 PM
Well, then just ignore health care as a factor in the current economic meltdown.
Posted by: FT Woods | Jan 12, 2008 6:52:13 PM
Ross,
"VJ, don't disagree with you. NBER (We're from the Government and these numbers are accurate.)"
Well, actually, the NBER is in the private sector, and I may have been too subtle earlier. The President and Chief Executive Officer of the NBER is Martin Feldstein. Given his sympathies, would he invoke the expanded definition of recession in regards to this administration ?
.
Posted by: VJ | Jan 12, 2008 7:08:06 PM
Good points about consumer debt being substituted for MEW but to go OT for a minute on Barry's question about which is right technically both could/might be. That is we might avoid a recession while still facing painfully low & slow growth; in fact part of the problem is a) <2% growth is painful and b) the outlook (from the Fed no less) is for ~2% thru '10. Think about that. The same article that stirred up Barry caught my eye so I dug into the reasoning behind arguing one way or another here:
Forecasting Consumption Demand: http://tinyurl.com/yuyune
Consumer spending is slowing but a predictor is growth in Wages + Employment which in real terms have turned down very...very sharply recently. The real dangers are that as growth slows the economy will tip over because of fragilities. And if it tips there's a huge number of fault lines in personal, financials and corporate leverage and debt to cause some major disruptions. Those are what we should be worrying about. A U-shaped low & slow might be the good news - unfortunately. More unfortunately we're still in K-R pre-denial as Barry pointed out. That is a lot of this despite all the Recession talk ain't made the headlines yet.
Veils of Delusion: http://tinyurl.com/yu66g8
Posted by: dblwyo | Jan 12, 2008 7:39:10 PM
rickrude, that is a swell idea. Only problem is your assumption that 1) the FED is interested in helping the little guy and 2) that the current debt woes will be solved by taking on even more debt.
Posted by: bt | Jan 12, 2008 3:27:51 PM
?????????????????????????????????????
you are right, it was my idea, but
the Fed is disinterested in the little guy.
But Bernake will give a 1% line of credit to
the Banks.
As to giving more debt, there is no limit
as the FED can do this infinately, until the
market (the world) determines that the value of the USD = 0.
Then all debt will be forgiven by the market.
Posted by: rickrude | Jan 12, 2008 7:44:42 PM
"Just a hunch, but we have been in a recession since August. If you adjust nominal GDP with REAL inflation data, we went negative then." Absolutely!!
"Remember that significant changes to the Bankruptcy Laws have made it significantly more difficult for those in overwhelming revolving debt to obtain relief..." Not if you've come to the realization that you are going to lose your house too, so why not go out with credit cards blazing.
As to your question, I believe Bloomberg's headline is correct. Because the FED will cut the funds rate to zero if necessary, keep increasing the money supply through TAFs and suck up the banks toxic waste through repos in order to reinflate the economy. Why? Well here is my theory: Collectively our country is 10 trillion dollars in debt. The best way to eliminate your debt is to inflate your currency until its worthless. Than your creditors will settle for pennies on the dollars that are owed them. In addition, with the looming retirement of the baby boomers you can finally break that system as well because hey, you've already spent all their money. Crazy?? Perhaps....
Posted by: Pat Gorup | Jan 12, 2008 8:01:13 PM
