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I've shown this chart several times now, and each time it elicits strong protests from readers. This update features data for the first quarter of this year that was released by the Fed last week. Note that this chart compares debt-related payments by households relative to disposable income. As such, it properly measures household's debt service burdens. (Comparing outstanding debt to income would show a rising trend, but that is misleading since it compares the stock of debt to the flow of income.)One point I have been making is still very much valid: household debt service burdens have not increased materially for a number of years, so there is no obvious reason to think that we are now in some brand new era in which households will be behaving differently than they have in the past. Indeed, as the dotted green line shows, debt burdens today are almost identical to what they were at the end of the 2001 recession, and not a whole lot higher (only 4%) than they were in 1987.
Bear in mind that this data incorporates a lot of the housing market collapse, an unemployment rate of 8.5%, the loss of 5 million jobs, and almost the full brunt of the equity market collapse.
I would also continue to assert that this means that once the financial losses from the housing collapse have been fully absorbed—and it shouldn't be too much longer, considering that markets have already priced in most if not all of the projected losses—households could return to something akin to normalcy.
At the very least, it is comforting to me to see that household finances on average have not been materially affected despite all the turmoil of the past 18 months. Indeed, as the last few datapoints show, debt service burdens have actually decreased in the past few years.
UPDATE: Good friend Don Luskin reminds me that disposable income was artificially boosted by lower taxes and some stimulus effects in the first quarter, so adjusting for that would mitigate the degree to which debt service burdens fell.
19 comments:
...household debt service burdens have not increased materially for a number of years, so there is no obvious reason to think that we are now in some brand new era in which households will be behaving differently than they have in the past.
Scott,
Without questioning the validity of your chart, the following are irrefutable facts:
A)household incomes have remained pretty much stagnant since 2000
B)bankruptcies are currently increasing at practically parabolic rates
In addition, since 2000:
1)health insurance burdens have increased dramatically on the average American Family, in many cases well over 100%
2)so have property taxes
3)so has food and fuel prices
4)millions of American families have unfortunately obtained adjustable rate mortgages which have recently been adjusting upwards
5)millions more got home equity loans
6)millions of Americans have recently seen their credit cards rates dramatically increased.
The above are all irrefutable facts.....and supported by the rapidly rising bankruptcy rates.
Healthcare burdens on some families may have increased 100%, but for all families the increase is a whole lot less. Energy spending as a percent of total consumption was the same in the first quarter as it was in 2000. Households have more floating rate assets than floating rate debt, so I think it quite unlikely that higher interest rates have been a bad thing for the average household. Millions may now be paying more on the credit card balances, but not the majority, and in any event credit card debt is definitely included in the Fed's numbers.
If you really want to dispute the data in the chart, however, you should take it up with the Fed.
I think the chart shows that most households have the cash flow to support a return to good spending levels. The one concern is will they increase savings and investments to try to push their portfolios back on track for retirement. I suspect most households will increase their savings, but still return to a high level of spending.
By the way, I find your charts fascinating. They are very instructive and help me a lot. Thanks.
From a supply-side perspective, savings is not bad, and consumption is not always good. The most important thing is work, risk-taking, and investment, since these are the things that boost growth. In aggregate we can only spend what we earn.
Increased household savings would not necessarily weaken the economy. If one person saves more, then another person has to spend more. All income is always spent. Money spent on investment stuff is called savings. More savings means more investment and that means more jobs. Government spending on stimulus projects is like a very weak form of investment, but it can bring benefits even though it is very inefficient compared to what the private sector could do with the money.
I'm glad you like the charts!
Scott,
With rates so low, risk assets historically low, is this a good time to leverage up and purchase equities specifically? If ever there was a time to use leverage, with a diversified equity portfolio, I would think the time is now!?!
You mean the Fed that told us Sub Prime was contained and housing prices wouldn't fall much?????
The reason many families are not paying more for health insurance is that we now have 50 million Americans not insured and 100 million Americans whose insurance is paid for by taxpayers.
But those families that actually pay for their own health insurance, practically EVERY single one of them have seen their rates or out of pocket expenses increase by MORE than 100%.
By the way, those are the same families primarily responsible for spending.
Under the Bush Administration, total government spend increased from $3 Trillion to $6 Trillion. Bringing government spend back to 2000 levels will put our economy into an instant depression since much of current spend is simply borrowing money we don't have.
As far at the quality of the Fed's data, you mean the Fed run by this guy....
http://www.youtube.com/watch?v=sXJpr7Yfp4E&eurl=http%3A%2F%2Falstry.blogspot.com%2F&feature=player_embedded
Scott,
The data coming across my desk everyday and facts I read simply does not match your graph...
If debt as a percentage of income was as represented, defaults should be pretty much constant as well.
The percentage of Los Angeles County mortgages delinquent by 90 days or more in May was nearly double the rate last year, First American CoreLogic reported today. May's 9.5% delinquency rate for L.A. County was up from 5% of mortgages late by 90 days or more in May 2008.
http://latimesblogs.latimes.com/laland/2009/07/la-county-may-default-rate-double-last-year.html
If you think residential is bad, commercial is deteriorating at a much steeper rate.
Scott,
Pardon me if this is a silly question, but does this chart imply that low consume as an aggregate in USA is due more to a "lack of confidence", which drives saving rate higher, rather than a sharp decrease of personal income? Outside USA, and in Europe, the American level of aggregate consume is probably regarded as the most important variable and predictor of an eventual recovery.
Thanks. Learning a lot from your blog.
Scott,
Enough is enough.......
Do you really believe that total debt/financial payments are really LESS THAN 20% of DISPOSABLE income?
Come on my friend, who is kidding who.....why don't you take a stroll down to your favorite mortgage broker and ask him to provide you with some representative qualification ratios for the average loan he or she writes.
Let's look at an average family with a Gross Income of $50K and a typical mortgage of $150K.
Just PITI on the house would approximate CONSERVATIVELY $13K or 26% of Gross Income.
Then take car payments of $5K per year and credit card payments of $2K and now we are rapidly approaching 30% of Gross Income.
30% of Gross Income.....my guess is that if you go talk to your favorite loan officer or mortgage broker, my numbers will be far more reflective of average than the chart you provided.
Scott,
Looking at debt service means that this ratio is dependent upon artificially low interest rates courtesy of Fed manipulation. Also, looking at aggregate data is probably not very instructive. The people who are increasingly defaulting are likely to be toward the low end of the income spectrum. On average, maybe everything is the same, but for some subset that is obviously not true.
In any event, the very last thing I want to see is more "normal" consumer behavior like we had during the housing boom. Once again we have an environment with interest rates being held far below free market levels, distorting just about everything that happens in the economy.
I find this statement fascinating: "From a supply-side perspective, savings is not bad, and consumption is not always good." Putting the statement in these terms certainly reveals the Keynesian roots of supply side economics.
From the Austrian School perspective, increased savings generate market forces which reallocate resources from retail and other "late stage" businesses to capital goods production -- it is always a good thing. Since increased consumption means decreased savings and capital consumption it is always "bad" in the sense that it makes an economy less productive.
I have never had much belief in this chart. The facts on the ground completely refute the smoothness of your analysis.
And your analysis presupposes you know what the actual tipping point is before debt becomes a burden on households. Which is highly unlikely.
You have published a similar chart for years about how America can absorb $100+ oil prices yet almost every recession was preceded by high oil prices including this one.
At times like these, it makes more sense to use commonsense and this simply ignores the micro level by explaining eay stress at the macro level.
Antonio: As a supply-sider I believe that consumption (demand) is not the primary driver of the economy. Those who focus on demand (the Keynesians) don't seem to understand that the only way the world can consume more is to first produce more. Production, work, and risk-taking are the things that must change on the margin, not demand.
Savings as measured by the government is a very nebulous concept. To begin with, it is not calculated correctly, and it would be very difficult to do so in any event. As a result I don't pay much attention to the savings rate. One person's savings becomes the fuel for another person's spending; all money saved must eventually be spent by someone. How money is spent is the key. If money is spent for productive purposes, then it fosters growth.
Kate: I have argued in previous posts that this is probably a good time to leverage up. The Fed wants people to borrow; they are trying very hard to encourage borrowing, by keeping rates very low. You should never fight the Fed. Money is extremely cheap. Most people are still in the process of deleveraging, so it can be a good idea to go against the crowd.
The trick is to find the assets whose prices are most likely to rise. All I can suggest is that there are things that look cheap to me, such as equities and commodities, and increasing, real estate in the most depressed markets.
If debt burdens are the highest ever with rates the lowest ever, then (to put it somewhat colloquially) Fed hikes will kill the consumer, no? (Very similar situation in Australia, incidentally.)
Actually, that is not true. Households have a lot more floating rate assets than floating rate debt. So higher interest rates are a net positive for households. Think about all the seniors with bank CDs.
Higher interest rates only become problematic for the economy as a whole when nominal rates exceed inflation by a wide margin for at least a few years. Higher rates would be a clear positive right now, since they would signal that the economy was returning to health and getting stronger, and that would boost confidence.
Also, Australia is very different from the US, mainly because most mortgages in Australia are floating rate, whereas in the US the vast majority are fixed rate. So Australia is much more sensitive to increases in interest rates from its central bank.
Scott --- thanks for your reply. Is there data on floating rate assets vs. liabilities? I don't see anything in the Flow Of Funds data, unless one makes some assumptions about the distribution of fixed vs. floating for mortgages and consumer credit.
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