Confidence and Consumption Show Signs of Life
Since the end of the recent recession, the economy has been struggling to regain a solid footing and return to precrisis levels of employment and GDP. GDP has returned to positive growth, and despite an elevated unemployment rate, there are signs that the economy is slowly gaining traction and improving. One such indicator of positive growth is the University of Michigan’s Consumer Sentiment index, which surveys consumers’ level of optimism in the economy, and, theoretically, mirrors their level of willingness to consume.
Consumer sentiment clearly dropped during the recession, bottoming out at 55.3 in November 2008. Following this drop, however, it followed an upward trend and slowly returned to precrisis levels. There is one outlier in the upward postrecessionary trend, in August 2011, when consumer sentiment dropped to 55.7. This decrease was most likely caused by the U.S. debt ceiling debate and consequent downgrading of U.S. government securities. Currently, consumer sentiment is at 82.6 for the month of November, a level not seen since September 2007. Consumer sentiment is an important indicator of an improving economic landscape, as around 70 percent of GDP comes from personal consumption expenditures.
Given that consumer sentiment has improved since the recession, it is natural to wonder if this optimism has translated into increased consumption. Personal consumption expenditures can be analyzed by considering trends in durable consumption and nondurable consumption. Durable goods, as defined by the Bureau of Economic Analysis (BEA), include goods that have an average lifespan of at least three years, such as automobiles and household furnishings. Nondurable goods have an average lifespan of less than three years, such as clothing, food, and fuel. Consumption of both durable and nondurable goods decreased significantly during the recession, more so than during previous recessions. However, both have shown strong signs of recovery. Durable consumption has grown around 26 percent from its low of $1,086 billion in the second quarter of 2009, to $1,363 billion in the third quarter of 2012. Nondurable consumption has increased approximately 7 percent from its low of $1,973 billion in the second quarter of 2009, to $2,105 billion in the third quarter of 2012. A question that naturally arises after noting this increase in consumption is how are consumers funding this additional spending?
To see if consumers are borrowing more, we construct a measure of the average consumer’s debt burden using data from the Equifax Consumer Credit Panel and the BEA. The measure is the aggregated sum of all the minimum payments that consumers are required to make on all of their open accounts, excluding student loans, as a fraction of aggregate disposable income*. As indicated in the chart below, the debt burden has been steadily decreasing since the last recession. The most recent data show that in the second quarter of 2012, the debt burden was 12 percent, down from its high of 16.4 percent in the first quarter of 2004. This decrease indicates that on average consumers are likely not borrowing to increase their consumption. [*Initially, we made this calculation with monthly debt payments and annual income. On November 27 we updated it using quarterly debt payments and quarterly income.]
The trend is similar for mortgage debt. The chart below shows the aggregated required payments on all mortgage accounts (mortgages, home equity loans and lines of credit) relative to aggregated personal disposable income. It has also been steadily decreasing since the beginning of 2009.
Mortgage payments may be decreasing because there are fewer mortgage originations and thus fewer overall payments. Repeat home sales have fallen steadily from a high of around 775,000 sales in August 2005 to 174,000 sales in August 2012.