I was looking at the latest G.19 report from the Federal Reserve and noticed that the only major holder of consumer credit who increased their loans was the Federal Government. For people unfamiliar with this report, this is where the government reports its student loan holdings. It is probably too early to declare the consumer driven economy as dead and buried but you get the gist. It is hard to be optimistic about a growing economy in 2014 when the only folks borrowing money in February were students. Read it and weep!
Consumer Credit
Who’s Borrowing Now? The Young and the Riskless!
Last week I mentioned that “Student Loans Account for 59.5% of the Consumer Credit Added in 2013”. This week the New York Fed explains in the post, Just Released: Who’s Borrowing Now? The Young and the Riskless!, that the credit card borrowing grew for folks with high credit scores. Since the total credit card debt barely grew in compared to 2012 the increased borrowing by those with high credit scores was offset by reduced borrowing by those folks with lower credit scores. This data leads me to believe that in 2013 this consumer driven economy was stuck in stall mode. Hopefully 2014 will be better. Their site has been up and down today so here is a copy of their chart.
For those folks who want to play with the data more you should take a look at the Fed’s interactive graphic or download the spreadsheet.
Student Loans Account for 59.5% of the Consumer Credit Added in 2013
The Federal Reserve recently published the G.19 and the 2013 results were pretty dismal for a consumer driven economy. Consumer credit increased a respectable $181.7 billion. This was a 6.2% gain from 2012. Revolving credit growth increased a meager $16.1 billion for 1.9% gain compared to 2012. This number is very close to last year’s 1.5% inflation rate. Most of the consumer credit action occurred on the non-revolving credit side of the ledger which grew $165.6 billion or 8% compared to 2012. When we take out the portion issued by the Federal Government and educational institutions for student loans, we get $57.4 billion was spent on cars and other stuff. This amount is 2.8% higher than in 2012. By far the largest percentage of the consumer credit increase is attributable to student loans. It grew $108.2 billion or 5.2% compared to 2012. Student loans account for 59.5% of the total consumer credit added. At least for me this explains why our consumer driven economy is having trouble growing faster than 2% per year. The consumer is still hunkering down.
Consumer Credit Update
For those inquiring minds that like annual comparisons, consumer credit increased from $2,627.4 billions in 2011 to $2,778.2 billions in 2012. This is 5.7% increase. Almost of all of this increase came from non-revolving credit(auto loans). Non-revolving credit increased from $1,780.1 billions in 2011 to $1,928.4 billions in 2012. This is a 8.3% increase. The revolving credit(credit cards) had a 0.3% increase from 2011 to 2012. This is good news for the auto industry and bad news for everyone else selling to the consumer.
The Federal Reserve likes to estimate annual rates using quarterly results. It is a different way to look at the same problem. Here is their statement.
Consumer credit increased at a seasonally adjusted annual rate of 6-1/2 percent during the fourth quarter. Revolving credit was little changed, while non-revolving credit increased at an annual rate of 9-1/2 percent. In December, consumer credit increased at an annual rate of 6-1/4 percent.
Calculating Average Credit Card Debt per Household
Recently I was puzzled by a debt service chart included in a presentation by Abby Joseph Cohen. The data for her graph comes from the Household Debt Service report produced by the Federal Reserve. My problem is reconciling the data with my belief that the average family is under a greater debt burden than is represented by the data. Although credit card debt is a small portion of the consumer debt, it is the most attractive debt to pay off as soon as possible.
Credit card debt is described by the Federal Reserve as revolving debt. The latest number from the Federal Reserve Consumer Credit report is 815.4 billion dollars. The Census Bureau’s Quickfacts says the number of households in the US is 114.2 million. When we divide these two numbers together, we get the average credit card debt per household is $7,140.
If we take the average credit card debt and plug it into Bankrate.com’s minimum payment calculator we get a minimum payment of $178.50 or $2,140 per year. For those who are curious this plan results in $10,133.07 in interest payments and 308 months(25 years) to pay off the balance. If we divide the annual minimum payment amount by the BEA nominal disposable personal income per capita, $37,976, we get 5.6% debt burden. This debt burden is a little higher than the 4.95% debt service burden reported by the Federal Reserve. Hmm… if debt service payments is a good indicator of financial pain for the “average” household then I would have to agree with Abby that with debt service at 1990’s levels, the households are not suffering from making their payments. Here is where I have a problem with Ms. Cohen’s analysis. My numbers imply that the consumer is making minimum payments on high interest loans. This is typically the sign of either a financially “dumb” consumer or a consumer who is maxed out. Neither situation will lead to sustainable consumer spending. With low inflation and wage growth the smart consumer should pay down credit card debt.
Comments on the Current Consumer Credit Report
Both James Pethokoukis and Cullen Roche made misleading comments about the growth in consumer credit after the G.19 report was released. Here is a quote from A weak recovery with a weak foundation built on credit card debt that highlights the problem.
A big leap in credit card debt in May. It surged by $8.0 billion, the biggest one month gain since November 2007.
Here is an updated graph from the Fed that shows both revolving and non-revolving credit from 2000 to the present. In the graph we can see that revolving credit(i.e. credit cards) is still depressed and growing slowly compared to non-revolving credit(i.e. auto loans). It is still down from its peak in 2008 while the non-revolving credit has already passed its 2008 peak. Using a one month change to describe a trend is misleading. Since last month’s G.19 report showed a decline in revolving credit and this month it shows a gain, I think it is a little early to make predictions on credit card debt growth.
Ignorance Is A Temporary Condition
Here is a great article I found on ETF Daily News that talks a lot about credit card debt. The article was originally published b the author here. I would like to believe that the consumer is getting financially smarter but he makes a pretty persuasive case that debt write offs is a much larger force in driving the drop in credit card balances than individuals paying down their debt. I guess the saying you can lead a horse to water but you can’t make them drink applies to American consumer attitude toward paying down credit card debt.
I am fascinated with America’s love affair with credit card debt and Rick has collected a lot more data on credit card usage than me. Some of the credit card data comes from private sources. I do not have a problem with the private sources but I think we could elevate credit card to a higher visibility level if the Federal Reserve defined what actually constitutes the average credit card balance. The problem is calculating the number of credit card holders. For this reason I found my attempts to calculate the average credit card debt level using the Federal Reserve data did not confirm what the private sector was reporting.
Federal Reserve Reports That Revolving Credit Shrunk Last Month
Considering the paltry investment returns in the bond market and real estate, I am surprised that the average consumer has not chosen to continue pay down their credit card debt. Well, the latest report from the Federal Reserve says the consumer is back on the debt reduction track. If you believe that a financially stronger consumer is best strategy for long term economic growth and middle class wealth creation, it is time to celebrate. If you believe that our economy needs a consumer spending spurt to jump start this moribund economy, it is time to cry in your beer. For either outcome you should break out the beers. Heh, heh!
UPDATE:
It’s a miss!
Consumer credit only grew $6.5 billion in April.
That’s well below expectations of $11 billion. Furthermore, the month before was revised down from a gain of $21.3 billion to $12.3 billion.
MORE: The full report is here, and one thing that stands out is that revolving credit actually shrunk.
Overall, a pretty punk report.
Read more: http://www.businessinsider.com/april-consumer-credit-2012-6
Have we reached a transformational point in the consumer driven economy?
The most popular post on the Wall Street Journal today is, “Wiping Out $90,000 in Student Loans in 7 Months”. Mihalic’s methods for reducing his costs are creative. He shows a gazelle like fear of debt that is emotionally necessary to paying debt down early and most importantly he is on the road to being completely debt free. Anyone who has lived no else for seven months probably has a plan for paying off his mortgage, too. This type of debt repayment would make Dave Ramsey proud but it does present some interesting questions about the economy. If this is the most popular post on the Wall Street Journal today, what does that say about the popularity of consumer debt? Has debt reduction become cool and has the America subconsciously picked a new socially acceptable debt level? I speculated in a previous post that it makes a lot of sense for America to pay down its credit card debt to a level much lower than today. If the new level for socially acceptable consumer debt is a number that is much lower than in the previous fifty years, what does it say about our consumer driven economy over the next couple of years if the consumer is diverting some of their spending power to reduce debt?
Here are some of tricks he used to pay his debt down early.
Mihalic said he spent months taking a flask of liquor to bars so he could continue to go out drinking with friends without running up a tab. (Be warned: this is typically illegal.) Instead of the movies, he took dates out hiking, or for bagels and coffee. He ate protein bars packed from home and walked several miles to the city, to save a few bucks on transportation, during a trip to Michigan. He got two roommates to rent out his house.
Mihalic also took steps that financial advisers typically say are a no-no: He liquidated his individual retirement account, drawing a tax penalty, and stopped contributing to his 401(k), even though his employer offers a matching contribution.
The Dilemma of the Quantitative Easing
On Friday the economic statistic I was most interested in was the revolving credit in the Federal Reserve Consumer Credit report. Considering the returns we are experiencing in the stock market, bond market, housing market, and certificate of deposits, the best return for your investment is to pay down your credit card debt which is typically over 18%. Would the average American be the pragmatic investor? The answer continues to be yes.
The next question I had was how long would the average American continue this trend? So I did a few graphs of revolving credit over time to see if disposable income or inflation could explain how far it would fall. Then it struck me. I could not explain the rise in credit card debt. If we look at the graph we can see that the explosion in credit card debt is relatively new way to extract wealth from the middle class.
If you believe like Dave Ramsey that to road to personal wealth starts by getting debt free, our country’s goal for revolving credit should be approximately zero. Even if you believe there is a good reason to carry some credit card debt, the pragmatic decision for the average American will be to continue to pay down their credit card debt. The only attractive alternative to paying down your credit cared is mortgage refinancing. If the mortgage refinancing gig is about over, then the credit card repayment trend should accelerate this year since there are no better investment alternatives. Then we can move onto the next financial bubble, student loans. For the short and medium term continued deleveraging is the logical choice. It is ironic that quantitative easing program whose primary focus was to encourage spending and investment, has caused businesses and households to reduce their borrowing and focus on ways to create their own sustainable financial future. In a way this lack of trust response is a condemnation of the big government model of governing and it makes it much more difficult to grow out of our financial mess. The market may be telling us that we are in the process of establishing a new normal for the way we buy things and the way we govern ourselves or it might be as simple as we are just returning to the old way we bought things. If the private sector and businesses are unwilling to take the risk by increased spending and investments, the local and state governments will not see tax revenue growth. Although higher taxes can help a little bit, most proposals generate too little tax revenue to be significant. Over the years we created a variety of budget gimmicks but eventually state and local governments have to match up revenue, spending, and unfunded liabilities. As we phase out the budget gimmicks we will once again return to the old ways of running local and state governments. The big four blue states, California, Illinois, New York, and New Jersey, who have large budget deficits and unfunded liabilities are at the most risk to reduced growth prospects. They desperately need businesses in their state to start earning a significant portion of new profits from unit growth if the “grow out of their mess” strategy is going to work. Unfortunately this is easier said than done. Most of the recent NFIB surveys show that increased government regulations are making it harder rather easier to start up and run a business. The bad news is that if these four states cannot grow out of their mess, the country cannot grow out of its mess either. Hmm, maybe we need to listen to what the market is actually telling us and develop a plan that works for this market.