The Deleveraging of U.S. Households

U.S. households have been undergoing significant deleveraging since the Great Recession.  Credit card debt, for example, dropped from $866 billion in the fourth quarter of 2008 to $660 billion in the first quarter of 2013.

In an Economic Synopses essay, Juan Sanchez, senior economist with the Federal Reserve Bank of St. Louis, addressed a key question: whether the reduction in consumer debt is due to lenders restricting the credit supply in response to worsening labor market conditions or to consumers reducing credit demand in response to concerns about future income.

Sanchez used data from the Survey of Consumer Finances to examine deleveraging across education levels—high school dropout, high school graduate, some college and college graduate—between 2007 and 2010.  He demonstrated three significant findings:

• The mean credit card balances of all U.S. households fell 21.1 percent, from $3,538 to $2,791.  Large drops were seen across all education groups, ranging from a 17.7 percent decrease (high school dropout) to a 25.4 percent decrease (high school graduate).
• The percentages of U.S. households with some credit card debt fell 6.6 percentage points, with all education groups dropping except high school dropouts, which saw an increase of 0.9 percentage points.
• The mean credit card balances of U.S. households with credit card debt also fell, but only by 7.8 percent, from $7,681 to $7,081.  The changes were more heterogeneous across education levels:  The least-educated households decreased their credit card debt by 20 percent, on average, while the most-educated households decreased theirs by only 8 percent.

Sanchez concluded that “These findings suggest that both the supply of credit and the demand for credit affected deleveraging.”

Additional Resources

• On the Economy: Young Families Still Lag Everyone Else in Recovery from Recession
• The Regional Economist: The Rise and (Eventual) Fall in the Fed’s Balance Sheet