Meet the Author

O. Emre Ergungor |

Assistant Vice President and Economist

O. Emre Ergungor

Emre Ergungor is an assistant vice president and economist in the Research Department at the Federal Reserve Bank of Cleveland. He is responsible for the household finance section of the Banking Policy and Analysis Group, which conducts research on regulatory policy and banking issues and provides advice on financial policy formulation. He also oversees the Federal Reserve System’s Muni Financial Monitoring Team (FMT), which monitors municipal bond markets, state and local funding, and public pension funds. Dr. Ergungor specializes in research related to financial intermediation, information economics, housing policy, and credit access in low- to moderate-income households.

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Meet the Author

Patricia Waiwood |

Research Analyst

Patricia Waiwood

Patricia Waiwood is a research analyst in the Research Department of the Federal Reserve Bank of Cleveland. She joined the Bank in October 2011, and her work focuses on macroeconomics, financial economics, and banking.

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Economic Trends

Household Financial Position

Households are paying down their debt, spending cautiously, and expecting the economy to get worse

O. Emre Ergungor and Patricia Waiwood

In the years preceding the stock market and housing bubbles, household wealth grew faster than incomes, leading Americans to believe that they were getting richer. As the bubbles burst, the nation’s wealth-to-income ratio took a dive and returned to its long-term trend.

The adjustment took place as households constrained their spending and reduced their debt. Spending (consumption expenditures) peaked in 2008, and then hit their trough in 2009. Yet since then, the wealth ratio has oscillated along an upward-sloping path. Although consumption expenditures have rebounded since hitting the trough, growth has not been consistent.

While people often associate the word “savings” with money in the bank, an increase in the savings rate also means that people are paying down their debts. Before the downturn in April 2005, the personal savings rate had reached a record low of just 0.8 percent. The rate peaked at 8.3 percent during the recession, and since then, it has remained between 6 percent and 3 percent.

However, the savings rate behaved somewhat enigmatically during the last month of 2012 and the first of 2013: the savings rate rocketed to 6 percent from 3 percent, and then dropped to 2.4 percent. Personal savings, not personal income, is clearly the component more responsible for these movements. The reason for savings-rate volatility is skyrocketing dividend income before higher marginal taxes kicked in. The reason for this savings-rate volatility is that dividend income skyrocketed before higher marginal taxes kicked in.

Revolving consumer credit, which includes credit card balances primarily, plummeted in 2008 and has been flat in real terms for more than a year. Nonrevolving consumer credit, which consists of the secured and unsecured credit for student loans, auto financing, durable goods, and other purposes, is actually 8.2 percent above year-ago levels. In the first month of 2013, total consumer credit increased at a seasonally adjusted annual rate of 7.0 percent to $2,795 billion, adding a sixth month to a string of positive monthly increases. (The latest numbers are preliminary numbers from the Federal Reserve Board.)

Certain delinquency rates have dropped to their pre-crisis levels. As of the fourth quarter of 2012, this is true for commercial and industrial loan delinquency rates, as well as credit card loan delinquency rates. However, delinquency rates for residential real estate and commercial real estate loans remain elevated, extremely so in the case of residential real estate loan delinquencies. They stand a dizzying 7.3 percentage points above where they were at the start of the recession. Commercial real estate loan delinquency rates meanwhile stand 2.33 percentage points above where they were in late 2007.

Indexes of consumer sentiment and confidence have gained some traction since early 2009. Be that as it may, the indexes still have a ways to go before returning to pre-recession levels. The going looks tough, if we use as a gauge the University of Michigan’s index (which leads the Conference Board’s index by one month). Preliminary numbers show that the University of Michigan’s index of consumer confidence dropped to 71.8 in early March from a slightly upwardly revised 77.6 in February. In March, according to the data release, the fewest consumers in decades anticipated that their finances would improve during the year ahead, as evidenced by an 11-point drop in the index’s expected personal finances component.

Also, unlike the more favorable employment prospects that consumer held over 2012, they now expect net increases in the national unemployment rate. This is reflected in the drop in the economic outlook component from 87 to 70. In addition, just 20 percent of surveyed consumers expected their financial situation to improve during the year ahead. This was the lowest figure ever recorded, matching the lows first recorded in 1979 and 1980. When asked about the outlook for their finances over the next five years, just 33 percent of all consumers expected to be better off, the lowest level ever recorded.