Friday, August 28, 2015

Credit conscious consumers

If anything good came out of the Great Recession, it was the lesson—for consumers, at least—that debt can be a very unpleasant thing to have when the going gets rough. Consumers have taken that message to heart, by managing their credit card debt more carefully.

As the chart above shows, credit card debt outstanding fell from a high of $866 billion in 2008 to $703 billion as of last June. Relative to disposable income, credit card debt fell by fully one third over the same period.

Reduced credit card debt, combined with rising incomes, has dramatically reduced the percentage of credit loans that banks have had to write off.

Consumer loan delinquency rates are at their lowest level over 25 years, and falling.

All of the above is consistent with the Fed's calculation of household leverage:

Bottom line: consumers and households have trimmed their exposure to debt and are managing their debt much more cautiously and conservatively. This is, arguably, one of the under-appreciated facts that contribute to a positive outlook for the future.


Joseph Constable said...

Perhaps the slow growing economy is due to consumers cutting back on their debts. When they start borrowing to spend again then the economy can pick up its pace.

Thinking Hard said...

Demographics explains this. The baby boomers are deleveraging for retirement. This should continue for the next decade. The millenials don't have the income to replace the debt levels without increased leverage, longer terms, or lower standards. We are witnessing millenials increase debt levels in student loans and automobile loans. Just so happens the auto loans are increasing in length with lower standards. Student loans basically have no standards and are loaned directly from the government.

Please explain how you see demographics playing into the debt market. I don't see credit conscious consumers, I see people nearing retirement worried about their jobs, worried about how they will live for 20-50 years with reduced cash flow, and how they need to deleverage and reduce credit card debt and mortgage debt. Those near retirement are not concerned with student loans and auto loans for the most part. They are concerned about living expenses and low interest rates. There are no safe assets with a decent yield. ZIRP has had a negative effect on the people near retirement or in retirement. It has pushed the risk tolerance out because most "safe" assets have a negative real yield.

Demographics will play a huge factor in the headwind our fiscal policy and monetary policy must overcome in the next 10-15 years. The millenials should theoretically hold on tight and avoid debt to wait for lower asset prices. I am waiting to see 50 to 100 year mortgages to supplement the net worth and cash flow of retirees. Low interest rates have their place, but that is not the only factor.

Scott Grannis said...

Constable: Increased consumer borrowing does not necessarily stimulate the economy, and deleveraging doesn't necessarily weaken the economy. As I see it, the good kind of increased borrowing is that which comes as a by-product of increased work and risk-taking. If consumer borrowing increases and the economy strengthens, the cause of the stronger economy will be increased confidence and increased investment, not increased spending. Spending doesn't make the world go 'round, investment and work do.

Scott Grannis said...

Thinking: don't forget the huge influx of undocumented immigrants, which is only likely to increase. Increased immigration is the antidote to the aging of baby boomers and a huge fix for social security. Moreover, it is a source of stimulus to the economy because new immigrants bring new "blood:" they are more willing to work and invest than those who have lived here comfortably for decades.

Benjamin Cole said...

"Core-PCE inflation decelerated to a meager 0.87 percent annualized rate in July. The uptick in near-term inflation had provided strong support for a September rate hike as it was consistent with the view that last year's disinflation was temporary. That no longer looks to be the case, pulling apart the argument that the Fed can be confident that inflation will trend back to target. If anything, all the monthly data looks like noise as inflation slowly drifts further and further away from target."---Tim Duy

He goes on to ask why the Fed is not paying attention to the TIPS five-year forecast of inflation which is now below 1% on the PCE.

Global trade is now actually contracting.

Well, we will see what the Fed does in September but it doesn't look good.

There are a number of "interest-rate crackheads" on the FOMC who have been crying for a rate increase since about 1994....

You know, any day now inflation is going to run out of control....

Joseph Constable said...

Scott, come to my local grocery store where all the gringos have had their hours slowly reduced and replace by Mexicans. Seriously, that statement is disgusting. And lacking in rationality. How do Mexicans being paid lower wages increase the government's take of SS revenue. This is really ugly. The check-out people I got to know over the years are bitter and have had to take other part time jobs. And these whites worked as hard as any I have ever seen. 20% of Mexico lives in the U.S. I suppose 35% of Mexico living here would make you feel that your SS is even more secure.

Yes, decadent baby boomers certainly won't work hard for their money. But 20 something white kids are busting their asses and scraping by paying 60% of their income in rent and somehow they never qualify for subsidies like non-whites do and most often won't apply for it. So we have white grocery store check-out clerks demanding higher wages because they don't get subsidies from the government. And you like that.

You sound like a white liberal elitist. No, I am not a racist.

Remember the science fiction plot, it is probably the most common plot, in books, TV, and movies? Space aliens colonize the earth because their home planet is dying. Well, the U.S. is being invaded by aliens from unsustainable cultures. It they were sustainable they wouldn't be coming here. And the aliens bring their unsustainable culture with them. Not just that us "nativists" have to pay their rent, their food, and the rest, they bring their culture of sustainability with them.

I lived in a Mexican neighborhood for two years. Yes, your servants smile to you and are loyal. But you wouldn't believe what they say about you behind your back. In general. And what they say about melon heads in particular.

Here is an economic formula. Increase in population + increase in productivity + increase in credit = increase in GDP. Native kids are not having children because they don't have the subsidized income to form families. Should they start not marrying? Having children without the men so they can get subsidies too? They don't do it because they were taught well. It should be a sustainable culture but it appears only unsustainable cultures are smart enough to survive.

Hans said...

"Thinking: don't forget the huge influx of undocumented immigrants, which is only likely to increase. Increased immigration is the antidote to the aging of baby boomers and a huge fix for social security."

Undocumented illegals is the fix for many ills, so says the poster! Now law breakers are
welcome by this writer and his bloglog.

They are also a real "fix" for the failing Social Insecurity system?! If we need
undocumented illegal immigrants for new blood and investments, then the long term
future for America is indeed bleak.

Benjamin Cole said...

So, which is worst:

The classic GOP position (George and Jeb Bush), which is, "Bring in illegal labor, but do not give them the vote." (The perfect working class, btw).

or the Donald Trump position, "Do not allow illegal labor into the country, and deport those who are here."

or the Donk position, "Bring in illegal labor and then give them the vote."

Scott Grannis said...

The problems that most people seem to have with immigration are at root the problems of our welfare system. It's too easy to get handouts, and that destroys the work ethic—both for immigrants and for legal residents. We should fix our welfare system (by reducing government's role dramatically and relying instead on the private sector) and make it easier for immigrants to come legally if they are willing to work. This country was built by immigrants, the majority of whom came legally and had no choice but to work and fend for themselves. I don't see a problem with giving immigrants the vote after being here for 5 years with good behavior (that's when those with green cards become eligible to become citizens). I do see a problem with not requiring immigrants to learn English. That's essential if they are to become happy and productive citizens.

Thinking Hard said...

The problem that I see with immigration being the solution to the demographic problems in the U.S. is the fact that most developed (aka "educated") countries on Earth are also facing demographic problems. OECD, China, Brazil, and Russia are seeing negative 0-15 yr old population growth. Most developed countries are also seeing core population growth (15-64 yr olds) stagnate or outright decline with the trend line over the next decade showing a decline.

Immigration in itself is good if the U.S. allows the right kind of immigrants in. The U.S. needs education and highly productive immigrants, not low educated manual labor immigrants. The U.S. needs to allow ALL students that graduate from University in the U.S. a path towards citizenship. Not doing this allows for brain drain back to other countries. The U.S. needs to utilize the world class Universities as the ticket towards future growth instead of another line item on the books.

For anyone that sees immigration as the solution to the United State's demographic problems, I ask, where do you see the highly productive educated immigrants with investments coming from? Where do you see the slack in our demographic trend being filled without other developed countries experiencing even worse demographic trends? This isn't just a domestic problem, this is a developed world problem.

Seeing the demographic trends and productivity trends being projected over the next 10-15 years is eye opening. Where oh where does the growth come from? As Joseph alluded to above, increased credit is the option I see. Where are those 100 year mortgages and $500k undergraduate educations? Where are the 12 year auto loans? Where are the negative rates? What is the limit of the Fed's balance sheet? Is there a theoretical limit? I haven't read anything projecting any type of limit before confidence is lost. We have hopped down the rabbit hole, now what's on the other side?

randy said...

@Joseph: <> The demographic-economic paradox where more advanced economies tend to have lower birthrates isn't particular to our immigrant situation. I contend it has little to do with subsidization, but is the result of many factors.
* Women's "rights" - what a deal.. to have the right to live without the fulfillment of a nurturing family. Hey, I'm not even that religious.
* Selfishness - several 30+ guys working for me, look at you like your crazy to suggest they'd give up the life... porn and sports, money for beer, what else do they need.

My wife teaches at a school with predominantly Hispanic kids. One thing that is undeniable is that the Hispanic community has very strong family dynamics and work ethic.

Benjamin Cole said...

If any of you are worried about inflation picking up in future years, I will tell you to rest easy.

You know about recent Jackson Hole confab, which is sort of a "rock star" gathering for global central bankers?

Here is the agenda (no, they don't work afternoons):

Friday August 28

8:00am Inflation Dynamics Through Firms’ Pricing Behavior
9:00 am International Aspects of Inflation Dynamics
10:25 am Central Bank Perspectives on Inflation Dynamics

Saturday August 29

8:00 am Reinflation Challenges and the Inflation: Targeting Paradigm
9:00 am Inflation Dynamics During and After The Zero Lower Bound
10:25 am Overview Panel: Global Inflation Dynamics

Do you notice anything? Oh, for example, that there is no other topic worth discussing except inflation?

So, right now inflation is dead in the U.S., deader in Europe, and long dead in Japan. But it is only topic central bankers talk about. And believe you me, they are not talking about how to get inflation higher.

The current hip policy pose is for deflationary growth.

I suspect Japanification is the future, but we will see.