Monday, April 29, 2013

America's Indebted Consumers - An Explanation for Poor Economic Growth

Consumer spending is the driver behind economic growth in today's economy.  Since consumer spending in the U.S. makes up roughly 70 percent of GDP (including spending on health care), rises and falls in spending by Main Street has a significant impact on overall economic growth.  

According to the Bureau of Economic Analysis, real personal consumption expenditures (PCE) increased by 3.2 percent in the first quarter of 2013 compared to 1.8 percent in the fourth quarter of 2012.  The biggest increase was seen in the purchase of durable goods, up 8.1 percent in Q1, down from an increase of 13.6 percent in Q4 2012.  It's buy, buy, buy time as you'll see on the next graph.

Here's a graph from FRED showing how real PCE has performed since just before the beginning of the Great Recession:

Here is a graphic from the Federal Reserve Bank of New York showing how household debt levels have changed over the past eight years:

While household debt has decreased from its peak of $12.64 trillion in the third quarter of 2009, it still stands at a whopping $11.34 trillion when both housing and non-housing debt is included.  Note that while housing debt levels have dropped, non-housing debt levels have remained consistently high and , for the first time since 2008, have grown by $31 billion in the last quarter of 2012.  This explains the growth in personal consumption expenditures noted above.  

Here is an even more detailed breakdown of what American consumers are using credit for:

Now for the bad news.  Here is a graph showing which types of loans are delinquent:

Lastly, here is a graph showing the percentage of loans based on their delinquency status:

While the percentage of loans that are 120 plus days or more overdue has dropped since the depths of the Great Recession, over 6 percent of borrowers still find themselves in credit hell, only slightly better than the 7.5 percent at the depths of the consumer credit crisis and well above historical norms.

With an elevated number of American consumers still finding themselves with credit difficulties, perhaps we have an explanation for the rather lukewarm GDP growth numbers four years into the "recovery".  What is particularly concerning is that once interest rates begin their march back to historical levels, American consumers will find that they simply cannot afford to buy, buy, buy.

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