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