Here’s a quick rule for evaluating news or opinion about the economy: Be very suspicious when someone uses a lot of hyperbole like ‘soaring,’ ‘slashed’ or ‘plummeting’ to describe changes in the economy. Our nation’s economic problems are serious, but changes in economic indicators in either direction usually come more slowly than people realize.
This warning is prompted by a recent letter to the editor asserting “personal debt, mortgage debt and credit card debt are all spiraling downward at an incredible rate.”
Yes, household debt is falling, but few would find the rates incredible. For example, at the end of 2009, total residential mortgages totaled $10.8 trillion. This was down 2.2 percent from a year earlier. But it still was 6.1 percent above where it had been in 2006 and 18.4 percent above 2005.
There also is some retrenchment in nonmortgage consumer debt. As of January, it was $2.48 trillion, down 2.4 percent from the high-water mark at the end of 2008 and almost exactly where it was in August 2007, when the financial crisis began to unfold. But even after adjusting for inflation, it is 27 percent higher than a decade ago and 87 percent above where it was 20 years ago.
Looking at revolving consumer credit, which is largely credit cards, the outstanding amount owed in January is down 11.5 percent from the high, again back at the end of 2008. But it is 12.4 percent higher than a decade ago and 143 percent higher than in 1990, again adjusted for inflation.
One also must remember that debt can fall for two reasons. It usually is paid off. But it also declines when discharged by a bankruptcy judge or when a lender writes off bad debt. Those are important components of the declines in both nonmortgage and mortgage debt.
One study by Cardhub, a private-sector analysis firm, showed that of the $93 billion decline in outstanding credit card debt in 2009, $83 billion came from such charge-offs by lenders rather than household pay-downs. Moreover, the proportion that came from charge-offs increased as the year went on.
For the last nine months of the year, write-offs were $66 billion, and debt outstanding decreased by only $29 billion. Households were letting balances swell rather than paying them down, offsetting more than half of lender write-offs.
Taken together, this hardly represents “spiraling downward at an incredible rate.” Household finances need to improve, and some movement is in the right direction. But other indicators show household finances are getting worse. Household debt service payments calculated by the Federal Reserve show some decline but remain above any level ever hit prior to 2001.
The deleveraging of households and businesses is going to be a long, hard slog complicated by the fact that economic growth, and thus income, is likely to remain sluggish for at least a few years and unemployment is likely to remain high. Don’t expect anything incredible.
© 2010 Edward Lotterman
Chanarambie Consulting, Inc.