Putting Consumer Debt Into a Bigger Perpsective

One thing you could be sure of in pre-Great Recession America was that U.S. consumer debt would rise pretty consistently. The chart below from a Federal Reserve Bank of New York report titled Quarterly Report on Household Debt and Credit depicts the trend: In the 10-year period from 1999 to 2008, debt dipped significantly only once, in mid-2001.

Considering that 2001 was a recessionary year marked by 9/11, that's all the more remarkable.

Then came the recent downturn. The expansion of debt peaked in mid-2008 and then began a steady decline as the recession took hold. Though the slump officially ended in mid-2009, consumer debt continued falling through 2010.

As reported on DailyFinance earlier this month, consumer credit use staged a modest recovery in December 2010: Revolving debt (credit cards) increased from $807.2 billion in November to $826.6 billion in December, and nonrevolving debt (auto loans, etc.) rose from $1.608 trillion in November to $1.611 trillion in December.

This expansion aligns with the 0.6% improvement in retail sales logged in December and the 6.7% rise in consumer sales for 2010. But does this increase mark a new trend of rising consumer debt, or was it more akin to bouncing along the bottom?

To get some longer-term perspective on this question, let's look at some charts from the St. Louis Federal Reserve and review both the Federal Reserve's Flow of Funds report and the New York Fed's recent report on consumer credit.

An Economywide Expansion of Debt

As we can see in the chart below, consumer debt rose steadily during the inflationary 1970s, flattened briefly in the deep recession of 1982-83, and then began a steep 25-year rise. Consumer debt rose from $2 trillion in 1984 to $14 trillion in 2008 -- an extraordinary expansion, given that adjusted for inflation, that $2 trillion from 1984 would equal $4.23 trillion in today's dollars.

That is, even discounting for the effects of inflation, consumer debt more than tripled.

At $14 trillion, the debt is equivalent to the entire GDP of the U.S. That's a big number, but as the next chart demonstrates, it pales in comparison to the total debt, both public and private, racked up by the nation as a whole since the early 1980s.

If total debt owed had tracked inflation since 1984, then it would be around $20 trillion. Instead, it's more than $50 trillion.

What's striking about this long-term consumer credit chart is the modest scale of the recessionary dip in debt: The recent break from relentless expansion of debt doesn't look very significant on this chart.

Clearly, America has been on a debt binge since the mid-1980s. In constant dollars (adjusted for inflation), the nation's GDP rose from $6 trillion 1985 to $13.4 trillion in 2010 -- an increase of 223%.

If debt had risen in proportion to GDP, then the nation's total would be around $22 trillion, not $52 trillion.

Digging Into the Debt Data

You've probably noticed that there are three different numbers for total consumer debt presented in the various Federal Reserve reports and charts: The St. Louis Fed pegs total consumer debt at above $13 trillion, the New York Fed's chart claims it's $11.4 trillion and the definitive Federal Reserve Balance Sheet of Households sets the total at $12.5 trillion: $10.12 trillion in mortgages -- including home equity lines of credit (HELOCs) -- and $2.4 trillion in consumer debt -- credit cards, auto loans, etc.

Sponsored Links

Despite the variances in debt totals -- discrepancies caused by the inclusion or exclusion of small pools of consumer debt such as "other loans and advances") -- what all sources confirm is that debt hasn't declined very much. Consider mortgages and HELOCs: With several million homes already foreclosed on, and several million more in the pipeline, you'd think mortgage debt might have declined more than a meager 4% just from bank writedowns.

But mortgage debt has dropped from a housing bubble high of $10.53 trillion in 2007 to $10.12 trillion in the fourth quarter of 2010 -- not much, considering the significant decline in home prices in those years.

Consumer debt has barely moved in that time -- from $13.8 trillion in 2007 to $13.43 trillion in 2010. Revolving and nonrevolving consumer debt (credit cards and auto loans) sank from $2.55 trillion in 2007 to $2.4 trillion in 2010, but "other bank loans and advances" leaped from $237 billion to $394 billion -- a hefty $157 billion rise.

Not Rising, Not Falling

According to the Fed's comprehensive accounting, total consumer debt fell by $370 billion from 2007 -- a decline of only 2.7%.

Upon closer examination of the Fed's Credit Market report issued on Feb. 7, several numbers really jump out. Conventional consumer debt (credit cards and auto loans) has been bouncing around since 2009 in a trendless fashion.

Debt fell from $2.55 trillion in 2007 to $2.406 trillion in early 2009, then popped up to $2.437 trillion in the fourth quarter of that year, only to decline again in mid-2010 to $2.411 trillion.

In effect, consumer debt has been moving up and down in a narrow band for the past two years, neither declining nor rising significantly.

Banks Get More Conservative About Credit Cards

Strikingly, the total consumer debt that was securitized and sold to investors has plummeted by over half-a-trillion dollars, from $683 billion in 2007 to $133 billion in late 2010. This suggests that lenders are no longer able to sell off their consumer debt accounts and are instead holding them.

Given that the banks are at risk for future losses, it should come as no surprise that, according the New York Fed report, credit card issuers slashed the number of card accounts from almost 500 million in 2008 to 380 million now -- a reduction of 23% in a few short years.

That's still a lot of cards, and we seem to be churning those accounts rather vigorously: A whopping 211 million credit card accounts were closed in 2010, and 164 million were opened.

Judging by the delinquency rates, lenders and borrowers aren't out of the woods yet: 10.8% of all debt is delinquent, down a bit from a year ago, at about $1.2 trillion. That's nearly seven times the GDP of Ireland and nearly four times the GDP of Greece.

Deep Indebtedness Continues

While the number of delinquent mortgages has declined -- when homes are foreclosed on, they're no longer delinquent -- both credit card and student loan delinquency rates are still rising: about 13% of credit card accounts and 11% of student loans are delinquent.

While there are bright spots in the report -- auto loan and mortgage originations have risen substantially from their lows -- there's no getting away from the historically deep indebtedness of the nation and its consumers, the stubbornly high delinquency rates and the modest declines in total consumer debt.