Consumer Debt Retrenchment
Consumers have been curtailing their spending for months now - we’re now deep into this recession, and virtually everyone is trying to save cash. The savings rate has rebounded from it’s near-negative numbers. And now, consumer debt - the money individuals borrow through car loans and credit cards - is falling in tandem.
Source: WSJ
Some of the specifics:
Nonrevolving credit, which is mainly automobile loans, increased in February by 0.2%, or $314 million, to $1.608 trillion. Credit in January climbed 4.6%, or $6.2 billion.
Revolving debt, which mostly reflects credit-card financing, retreated by $7.8 billion to $955.7 billion in February, or 9.7%. Credit in January had increased $2 billion.
What is most important to note is that these numbers exclude real estate mortgages - which has largely fueled our debt addiction in the past years. So even with a significant decline in consumer credit, consumers are still a long way from fully deleveraging. John Carney over at Clusterstock notes that consumer credit never adjusted after the 2001 recession - we’re now compensating for the unreasonable growth since then. He notes that this correction bears some striking parallels:
If this sounds familiar, congratulations. You’ve been paying attention. The growth of consumer debt mirrored in many ways the growth of mortgage debt. Unfortunately, the risk models were flawed in the very same way that mortgage risk models were flawed. Basically, both assumed that borrowers burdened with a higher level of debt than historically precedented would continue to behave like borrowers had with lower levels of debt. Additional mathematical modelling, based off of things like CDS pricing, only compounded this initial error.
I have a hard time thinking this anything but a positive sign - as I’ve said a hundred times, we’ve been living beyond our means (not earning what we spend), so we need to get back in line. And a retrenchment of consumer credit is an example of consumers doing just that.
