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Monday, June 11, 2007

Consumer Credit G.19

This graph is of the data contained in the Federal Reserve's G.19 release. The numbers for each ending and starting quarter (balances at the end of Q4 and then Q1 of the next year) are pulled from the original releases in June of each year. If you click on the graph to look at the larger version, you can see that consumers charge up their credit cards for Christmas each year and pay them down somewhat in the first quarter. Consumer debt is split into revolving (mainly credit cards) and non-revolving (auto loans and other consumer installment credit). Real estate secured debt is not included.

So far this year the pattern has not been significantly different than the norm, although more credit was paid down earlier in the quarter than later (which makes total sense when you think about gas prices and when most people get their tax refunds). The pattern looks similar to the 2003 pattern, which was not a good year for jobs.

The other major consumer debt release is Household Debt Service and Financial Obligations Ratios, which is published quarter by quarter with quite a lag. The Q1 release may be out later this week, and it's really necessary to get that before we can say too much about the current consumer debt outstanding. Lower interest rates can make servicing ratios (monthly debt payments/income) decline even while outstanding debt rises. When I get that release I'll update this. Because credit card interest rates are variable and due to the prevalence of much higher rates, credit cards have been a disfavored vehicle for servicing debt over the last few years.

There is one thing you can see clearly; over time more and more consumer debt has become associated with autos. That is because of longer loan terms which pay the loan down more slowly, and often auto debt from a previous purchase is now rolled into a new purchase. It really doesn't look sustainable to me.

The relatively low revolving numbers appear to have been produced by consumers paying down their credit card debt when refinancing their mortgages or through HELOCs. It's anyone's guess as to what will happen this year, but the early indications are that the refi cash-out is waning and that consumers are going to have to be more careful about racking up debt. Equity withdrawal has been declining recently (see this CR post for a graph through Q1 correlated with the trade deficit). The bottom line is that I don't think the consumer can backstop spending by using installment loans and credit cards in this environment. The combination of higher interest rates, a declining housing market and a high ratio of accumulated debt is closing the escape hatches for too many of them.

All this year, the retail sales numbers have been differentiating between high-end retail and low-end retail. High-end is doing very well; low end is struggling. Real inflation for fuel, utilities and food is pressuring a big percentage of the population.

Thanks for your analysis. Looks like the squeeze is on. Declining MEW, mediocre real wage increases and some other factors don't bode well for the PCE component of the GDP. Should be an interesting ride these next few quarters. Thanks,
Kevin - if personal income does what I think it's going to (following the pattern of the last few years), consumer credit takes a big hit in third quarter. As soon as we get the new FOR release I'll post on that.

It's not just declining MEW, it's also extremely high inflation and the credit overhang in relation to income that's been building for a few years.
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