Some interesting time series charts from the Federal Reserve in St. Louis I've been looking at recently. They involve consumer revolving credit. In the aftermath of the Great Recession, Americans are re-balancing their accounts and, for the first time in forever, reducing their revolving debt levels. Check this:
-- Per-capita revolving debt in 2005 constant dollars (shaded regions represent recessions)
We can see the big increase beginning in the 1990s, with the development of considerably more sophisticated credit models. These models allowed credit card companies to separate the unsecured credit market into correct risk categories. Because of this, we should probably interpret this big increase as both an increase in credit demand as well as in increase in credit supply: the equilibrium where we are able to separate credit riskiness probably has lots more loans being offered than the equilibrium where we have to pool the risky households with the safe ones.
But since the recession, we see decreases in these borrowing amounts. It is important to note that these are separate from the loans that have been written off or otherwise defaulted; similarly significant changes also live in time series that look at cohorts of stable accounts that have not defaulted.
There are several interesting possible explanations for this shift in consumer behavior. The two that I find most interesting are the changes in government spending and the lack of change in personal disposable income. A couple more charts should make the point.
Here is the Federal spending as a percent of GDP. Note that, during the Clinton years, this percent was decreasing ("The era of big government is over.") and consumer borrowing was increasing rapidly. Meanwhile, as government spending has increased significantly, consumers perhaps grasp that all that spending has to be repaid by somebody and so you'd better start saving for the time when taxes increase to pay that debt off.
So, this has some plausible affect on the level of consumer borrowing. The other -- and to my mind more interesting -- time series is the constant dollar household disposable income, per capita. Check this nightmare out:
Here is the Federal spending as a percent of GDP. Note that, during the Clinton years, this percent was decreasing ("The era of big government is over.") and consumer borrowing was increasing rapidly. Meanwhile, as government spending has increased significantly, consumers perhaps grasp that all that spending has to be repaid by somebody and so you'd better start saving for the time when taxes increase to pay that debt off.
Here is the per-capita disposable (that is, after tax) income series since 1991. This measure has stalled entirely since 2006.
This gives some support to the feeling that consumers perceive that their lifetime income profile might not be as good as they used to think. We can match this picture up with all sorts of poll data that suggests people think the next generation won't be as well off, or that the country is on the wrong track, or that consumers are gravely concerned about the economy. This chart provides a pretty good explanation.
In an environment where real disposable incomes are increasing, real wealth is increasing rapidly (we don't need a picture of housing prices!) and credit supply is expanding (because the companies can tell good risks from bad ones), it shouldn't surprise us that consumers want to pull lots of future consumption into right now. Our borrowing should have increased in that situation (maybe not as much as it actually did, but still..).
I suspect that people interpret the decrease in wealth associated with the housing bust, the significant increase in government debt, and the six years of no income increases as strong signals that the future income will be small enough that they don't want to pull as much of it into today.
This is a praticular risk for firms and individuals who buy consumer debt. And there are forward-looking indicators that should be of keen interest to them.
