Meet the Author

Yuliya Demyanyk |

Senior Research Economist

Yuliya Demyanyk

Yuliya Demyanyk is a senior research economist in the Research Department of the Federal Reserve Bank of Cleveland. Her research focuses on analysis of the subprime mortgage market, on the roles that financial intermediation and banking regulation play in the U.S. economy, and on analysis of financial integration in the United States as well as in the European Union.

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Meet the Author

Matthew Koepke |

Research Analyst

Matthew Koepke

Matthew Koepke is a former research analyst in the Research Department of the Federal Reserve Bank of Cleveland.

01.25.2012

Economic Trends

Are Consumers More Eager to Borrow?

Yuliya Demyanyk and Matthew Koepke

Consumer credit serves as an important indicator as to where the economy is heading. Generally, consumers borrow more when they are more certain about their financial prospects and less when they are less certain. Consequently, changes in consumer credit may indicate how confident consumers are about the economy and their desire to consume in the future.

Recent data from the Federal Reserve suggests that consumers may be becoming more confident in the economy and increasing their willingness to consume. According the Board of Governors’ November release, consumer credit grew 0.8 percent to an inflation-adjusted level of $2.0 trillion. That is the largest one-month increase since November 2001, when total consumer credit grew 1.4 percent (note that the Board’s measure does not take loans secured by real estate into account). November’s dramatic monthly increase was highlighted by many news organizations as a sign that consumers are quickly releveraging their balance sheets; however, a closer examination of consumer credit, adjusted for inflation, reveals that the level of total consumer credit remains well below the June 2008 peak.

Inflation-adjusted nonmortgage consumer credit outstanding peaked in June 2008 at $2.2 trillion. Since then, total real consumer credit has fallen 8.0 percent to just over $2.0 trillion. Revolving accounts—credit card loans and unsecured lines of credit—led the decline in consumer credit, falling 21.3 percent since the peak. On a year-over-year basis, revolving accounts have fallen continuously from February 2009 to October 2011—albeit at a decreasing rate.

November’s flat performance was the first time in nearly two years where revolving credit did not decline. It is clear from the Board of Governors’ data that consumers’ holdings of revolving debt declined far more dramatically in the wake of the financial crisis than their holdings of nonrevolving debt. It is unclear from the data, however, if those reductions in revolving credit were driven by consumers seeking to deleverage or banks cutting limits on credit cards and unsecured credit lines.

Nonrevolving credit—secured and unsecured loans for automobile purchases, mobile homes, durable goods, etc.—fell less significantly through the recession and subsequent recovery. Likely buoyed by relatively strong auto sales, nonrevolving consumer credit has fallen only 0.1 percent, to an inflation-adjusted level of $1.4 trillion, since June 2008. Moreover, while year-over-year revolving consumer credit growth has declined persistently since the financial crisis, nonrevolving credit growth hit an inflection point in October 2010 and has grown every month since then. Nevertheless, it is difficult to know if consumers will be interested in increasing their leverage based on the Board of Governors’ data, since it does not include mortgage debt.

However, data from the Federal Reserve Bank of New York’s Consumer Credit Panel suggests consumers may still be deleveraging. Those data show that while consumers have been taking on nonrevolving debt, they have been reducing their balances of mortgage debt.

Moreover, the Panel confirms that consumers have been dramatically reducing their revolving balances. According to the Panel’s third-quarter results, the amount of mortgage debt held by consumers has fallen nearly 10 percent since September 2008, to $8.4 trillion. Bank card debt (mostly credit cards) has fallen even more dramatically, declining nearly 20.0 percent to $690 billion. Thus, while nonrevolving credit has been rising throughout the economic recovery, consumers have been reducing their holdings of mortgage and credit card debt.

While the growth in consumer credit in November was impressive, it is difficult to tell if consumer credit will be able to grow at a similar rate going forward. One measure we can examine to gauge if consumer credit growth is sustainable going forward is the household financial obligation ratio. The household financial obligation ratio measures the amount of debt service—including auto lease payments, rental payments on tenant-occupied property, homeowners’ insurance, and property tax payments—relative to disposable income. The average household financial obligation ratio over the past 30 years has been 17.2 percent. For the past decade, the average household obligation ratio stood at 18.0 percent, 103 basis points higher than the 30-year average. However, since the first quarter of 2009, the ratio has dropped monotonically, falling from a high of 18.5 percent to its current level of 16.2 percent. For now, it appears that the ratio has stabilized. Moreover, given its relatively low level, there may be some room for consumers to grow their balance sheets going forward.