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:
>
click for larger chart
2008_norris_graphic

graphic courtesy of NYT
>

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 . . . ?

>

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

>
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&

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What's been said:

Discussions found on the web:
  1. Ross commented on Jan 12

    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.

  2. bsneath commented on Jan 12

    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?

  3. VJ commented on Jan 12

    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.
    .

  4. Winston Munn commented on Jan 12

    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'”.

  5. Ross commented on Jan 12

    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!!!

  6. SINGER commented on Jan 12

    Remember that significant changes to the Bankruptcy Laws have made it significantly more difficult for those in overwhelming revolving debt to obtain relief…

  7. Bob A commented on Jan 12

    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.

  8. Bob A commented on Jan 12

    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.

  9. larry commented on Jan 12

    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.

  10. bt commented on Jan 12

    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.

  11. lcmslutheran commented on Jan 12

    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.

  12. Mike G. commented on Jan 12

    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!

  13. FT Woods commented on Jan 12

    “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?

  14. bt commented on Jan 12

    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.

  15. rickrude commented on Jan 12

    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 ??

  16. bt commented on Jan 12

    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.

  17. Donny commented on Jan 12

    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.

  18. ken h commented on Jan 12

    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.

  19. FT Woods commented on Jan 12

    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.

  20. Mike G. commented on Jan 12

    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.

  21. FT Woods commented on Jan 12

    Well, then just ignore health care as a factor in the current economic meltdown.

  22. VJ commented on Jan 12

    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 ?
    .

  23. dblwyo commented on Jan 12

    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

  24. rickrude commented on Jan 12

    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.

  25. Pat Gorup commented on Jan 12

    “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….

  26. Suge Knight commented on Jan 12

    Pat Group, whatever it is you’re drinking or smoking, you need to share, by reading your posts I assume you’re smoking some good s h i t!

    Suge

  27. DavidB commented on Jan 13

    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 ??

    Hi rick,

    The Fed already tried that…..twice. They are otherwise known as the internet bubble and the housing bubble. Unfortunately, I think Joe average American is too dumb to see a gift horse handed to him. He went out and spent his internet gift on more expensive internet stocks and he spent his housing benefit on two and three other houses. Those were the SMART ones. The dumb ones bought BMWs and Hummers.

    There were a few(there always are) who actually took the gifts and either downsized into ‘free’ houses(most of those probably owned their houses before the housing boom so they understood the value of eliminating their mortgage) and dividend paying stocks but the majority just saw the opportunity as free money from crazy old uncle Al and spent it.

    I thought it would be different before seeing this debacle but unfortunately the average person is apparently unable or maybe unwilling to recognize opportunity and turn it into true long term benefit. THAT is why it would be foolish for the fed to try again without some serious financial education first. Maybe just honest savings rates would do the trick but as of now that is just wasted money from crazy Uncle Ben if they try that

  28. Ralph commented on Jan 13

    I am fascinated by how far some of these folks can get their head down in the sand.

    The big Picture, (no disrespect to our host), is:
    1. There was a vast influx of liquidity put into our economy. At some point that has to stop. If nothing else from a simple lack of inertia. That leads to CREDIT Deflation.

    2. Financial engineering has been the name of the game for close to 25 years now. Financial engineering is not growth!! It is just moving money from one group to another.
    This too has to eventually end! Worst case scenario, the groups that got the least will resort to disruptive tactics such as strikes in order to gain back some equality.

    3. Trends are very powerful. Once one gets intrenched, it takes a lot to cause that trend to change direction. It is not hard to see that we are in that process of changing a long running trend. With that change in trend, the tools and policies that helped to keep the trend going will no longer have any effect. As, in pumping liquidity into the system, lowering interest rates, tax cuts etc will no longer boost the economy.

    So, a recession is just plain inevitable. What is important is that by trying to avoid the serious consequences to our present policies we are pushing a little r to become a Big R. We would be so much better off in the long run if we would accept what was about to happen and just deal with it. Every day that goes by trying to ignore the holes that we are digging, will mean that much more pain on the flip side.

    For those of you who like the math and want to know, where will things end up settling out to. The answer is simply. Reversion to the Mean!!
    Every asset class has a mean. When I say every, I mean every. When I say revert, I mean revert. You can push an asset class above its mean but you can not change the mean. So, the longer you push it over the mean the lower it has to go below the mean to come back. MEANS DO NOT CHANGE very often. Once in 50 years maybe. Ergo, housing, debt ratios, stock markets etc, all have some correcting to do.

    Okay, I have rambled too much.

  29. UrbanFrugal commented on Jan 14

    Spending less than you make and saving some of that would be a wiser deicsion than mountains of credit card debt. Some people are finally waking up and realizing that they don’t need all of that stuff and just want to cut back.

    At a certain point, the loans need to be repaid.

  30. UrbanFrugal commented on Jan 14

    Spending less than you make and saving some of that would be a wiser deicsion than mountains of credit card debt. Some people are finally waking up and realizing that they don’t need all of that stuff and just want to cut back.

    At a certain point, the loans need to be repaid.

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