Households Continue Balance Sheet Repair


The Quarterly Report on Household Debt and Credit from the New York Fed provides additional evidence that households continue to pay down debts as a consequence of the Great Recession.  We have previously reported Fed data showing declines in outstanding mortgage debt. We have also made the argument that the personal savings rate will remain elevated as long as households continue to repair their balance sheets, reducing economic growth by channeling resources away from consumption and investment and thereby holding back robust job creation.

Some analysts have questioned whether the declines in household debt reflect pay downs or defaults.  The NY Fed data indicate that the declines are indeed related to active pay downs.  “Consumer debt is declining but only part of the reduction is attributable to defaults and charge-offs,” said Donghoon Lee, senior economist in the Research and Statistics Group at the New York Fed.

The Fed data show that outstanding consumer debt has declined by $922 billion since the third quarter of 2008.  As an example of this reduction in debt, the data show that the number of open credit card accounts has fallen 24% since the second quarter of 2008.

Moreover, the Fed reports that through the end of 2009 household pay downs of debt reduced funds available for consumption by about $150 billion, whereas from 2000 to 2007, increased consumer borrowing added $330 billion to consumer funds.  This swing of $480 billion represents about 3.5% of GDP.  The impact of the behavior is a reduced level of economic growth.  When balance sheet repair ends, consumption and investment should increase significantly.

With respect to mortgages, the NY Fed data indicates that households reduced their holdings of mortgage debt by about $140 billion. Mortgage originations are 26% above their trough in the 4th quarter of 2008 but remain 50% below levels witnessed in 2003 through 2007. About 2.7% of mortgage are in delinquency status as of the 3rd quarter of 2010.

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