Household balance sheets may be in shambles, and lenders badly wounded by the banking crisis, but, compared with some previous downturns, the recent contraction in consumer credit appears to have been middling so far.
Set against extraordinarily heavy debt loads, an apparent revival in personal thrift as the savings rate bounces off rock-bottom levels, and the damage to the financial system, the result is surprising.
On the other hand, the scale of the federal effort to repair the nation's malfunctioning credit apparatus has also been extraordinary, and keeping the spigots open for consumers has been a special target of the government's many interventions.
The Term Asset-Backed Securities Loan Facility, notably, helped to restart securitization activity for some categories of loans. Other programs have helped open up consumers' wallets: "cash for clunkers" subsidies, for instance, caused a spike in auto sales and spurred demand for credit for such purchases.
If June appropriately marks the turn in the economic cycle, the decline in automobile, credit card and student loans and the like during the recovery has been tracking the trend that prevailed after the much milder 1990-1991 recession. (See graphic below.)
Such credit totaled a seasonally adjusted $2.5 trillion in November, according to the Federal Reserve, a 2% drop since midyear after adjusting for inflation. The declines were worse during the first five months of the recovery after the 1980 recession, when consumer credit fell 2.8%, and the recovery after the 1973-1975 recession, when it fell 3.4%.
Still, the economy has only just started to climb out of recession, and the initial course may not hold.
Those unwieldy amounts of debt still loom. Household borrowing was equivalent to 97% of gross domestic product in the second quarter, compared with 74% in the quarter when the 2001 recession ended, and 44% when the 1973-1975 recession ended. (By another measure, however, household obligations have eased since the previous downturn. A ratio of debt, rental and other payments to disposable personal income that the Fed estimates was 28 basis points lower, at 18%, in the second quarter than the quarter when the 2001 recession ended.)
Moreover, tracking with markers established in earlier cycles would still mean a painful depletion. After three of the preceding five recessions, it took about a year and a half or longer for consumer credit to return to levels at the end of the downturns.
Indeed, while overall consumer borrowing appears to have held up relatively well, credit card receivables have created a major drag.
Sapped in part by exceptionally high chargeoffs, they have been contracting with unprecedented speed. In November they had fallen 4.4% since midyear, to a seasonally adjusted $874 billion. In four of the preceding five cycles, they either continued to grow after recession end or returned to growth relatively quickly.
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