Monday, June 21, 2010

Total consumer debt continues falling

The Federal Reserve recently published the updated total consumer debt statistics.  Total consumer debt continues contracting and shows no sign of slowing its rate of decline.

As I have implied throughout my posts I believe we are in a debt deleveraging cycle right now.  (Look at the second graph for evidence)  Longer term this is healthy for the country to 'flush out' the excessive credit built up over time.  Unfortunately debt deleveraging means reducing ones current spending to repay all the previous spending (or defaulting on your debts)  Either way it detracts from current growth.

In previous posts and comments I have mentioned the difficulty of determining how much of the decline in consumer credit (a subset of consumer debt. Don't blame me for the lack of clearer descriptions) is due to lower spending versus higher charge offs.  Fortunately the Federal Reserve has done a little work on this very topic:
Notably, year-over-year growth in consumer loans adjusted for charge-offs has remained positive, which contrasts the negative growth in the as-reported series. That is, the net growth in new loans and loan repayments shows a positive (albeit slowing) growth rate once charge-offs are factored in. Over 2009, this estimate of charge-offs totaled about $27 billion while banks' average consumer loan balances declined by about $25 billion. Thus, a significant portion of the recent decline in consumer loan balances is the result of charge-offs.
This may explain consumer spending being more robust than the consumer credit numbers were showing.  The consumers are still buying, they are just unable to pay for it :) 

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