Consumer De-leveraging: Have We Seen the End?
Consumer credit surged in the final months of 2011 with the Federal Reserve reporting a November increase of $20.4 billion in total outstanding consumer credit, the largest monthly increase in a decade. December followed suit jumping $19.3 billion, marking it as the third largest monthly increase in total credit since November 2001. Non-revolving credit accounted for the majority of overall growth for the year, increasing $89 billion or 5.5%, largely driven by student loans associated with the federal government. Revolving credit, which is mainly comprised of credit card loans, increased year-over-year just 0.1% in December and was flat in November, but marked the first months in which revolving debt growth was positive since before the recession. Much of this leveling off effect can also be correlated to rapid improvements in credit quality as credit losses were a significant driver of the “deleveraging” that has been widely publicized.
With the increase in consumer borrowing over 2011, there has also been an accompanying decrease in personal savings, suggesting a more fundamental shift in consumer behavior from just two years ago when the notion of a more frugal consumer became a prevailing theory. In 2009, consumer debt was down 4.3%, or $109 billion, and the personal savings rate according to the Bureau of Economic Analysis was near its peak at 6.2% during the second quarter of the same year. Compare that to the inverse pattern today, where debt is up 3.7% in 2011 and the savings rate is down to 4.5% for the fourth quarter. While much of the debt increase can be tied to federally funded student loans, the jury is likely still out on any long-term shifts in consumer behavior. Credit card mailings are increasing, promotional offers are returning to the market, and certain card issuers are posting modest increases in receivables. Ironically, the unemployment rate remains stubbornly high, the housing market is still a drag on the economy, and the recovery has been slow. It appears that we have turned the corner on deleveraging (or the pace of it, at a minimum), but prudent and profitable loan growth will be all about picking your spots in a market that has not regained its footing.
Figure 1: Net Changes in Consumer Debt, Seasonally Adjusted
Source: Federal Reserve data. Measured monthly. Excludes mortgages.
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