How Did Consumer Borrowing Change After the Great Recession?

By

Don E. Schlagenhauf

Don Schlagenhauf has been an economist at the Federal Reserve Bank of St. Louis since 2015. His research interest is in macroeconomics and policy, with emphasis on housing. He enjoys baseball. Don was born in St. Louis and has been a lifelong Cardinals fan. In fact, he is a season ticket holder for the Cards spring training. For more on his research, see https://research.stlouisfed.org/econ/schlagenhauf.

Q: How did consumer borrowing change after the Great Recession?

A: Following the run-up in household debt during the early 2000s, consumers have been steadily reducing their overall debt level (i.e., deleveraging) since the Great Recession ended in June 2009. The ratio of household debt to personal income peaked in the mid-2000s at nearly 1.2, and it has declined to about 0.9 in the second quarter of 2017.

However, looking at aggregate data tells us only part of the story. To better understand the run-up in debt and subsequent deleveraging, Carlos Garriga, Bryan Noeth and I studied patterns in mortgage debt, credit card debt, auto loans and student loans held by different age groups between 1999 and 2013.1

Obviously, the biggest change in borrowing over that period has been mortgage debt. In the early 2000s, average mortgage debt increased among all age groups, but especially for younger households. In 1999, homeowners with the largest mortgage debt (about $60,000 in 2013 dollars) were around 45 years old. In 2008, peak mortgage debt (about $117,000) occurred for those around age 42. Despite large deleveraging after the recession (particularly among those younger than 60), average mortgage debt remained higher in 2013 than in 1999.

For the other types of debt, the general patterns we found were:

  • Credit card debt also increased, primarily for those older than 30, and then began to decline after 2008. Unlike other types of debt, average credit card debt in 2013 was below its 1999 level for most age groups.
  • Auto debt also rose between 1999 and 2008, but dropped across all age groups after the recession. Auto debt then rebounded in 2013.
  • Student debt, on the other hand, consistently grew from 2005 to 2013 for all age groups. For those over 50, the rise is likely due to parents or grandparents taking on loans or co-signing for relatives.

Having debt is not necessarily bad, as it allows individuals to make up for the mismatch between income and consumption expenditures earlier in life; consumers just need to be prudent with the amount of debt they take on. By studying debt patterns, however, we hope to gain a better understanding of the tipping point between manageable debt and debt levels that expose consumers to excessive risk.

Endnote

  1. Garriga, Carlos; Noeth, Bryan; and Schlagenhauf, Don E. Household Debt and the Great Recession. Federal Reserve Bank of St. Louis Review, Second Quarter 2017, Vol. 99, No. 2, pp. 183-205. [back to text]

Reader Exchange

Letters to the Editor

The letters below pertain to articles in the Third Quarter 2017 issue of The Regional Economist. The first two letters are about the article titled Quantitative Easing: How Well Does This Tool Work?

Dear Editor:

I agree with you on the point that QE should not be repeatedly used in the future as a monetary policy because (1) purchasing private bonds is too influential to the firms’ financial health, which may result in economic biases; and (2) public sentiment can no longer be more optimistic than it was from 2008. On the other hand, I believe that people’s faith in QE positively worked at least in the past.

In the analyses with Japan and Canada, you did not mention exchange rates. However, both Japanese yen and Canadian dollars significantly changed during the past decade. I also studied international economics and learned that Canadian transports with the U.S. remarkably increased after US-Can FTA (1989), and its economy became more reliant on the U.S. economy. Likewise, Japanese trade volumes and its stock prices are reacting in accordance to JPY-USD exchange rates.

Therefore, the fact that Canadian real GDP boosted without QE is explained by 1) its reliance on US economy, and 2) large fluctuations in exchange rates.

By the way, nominal GDP in U.S. dollars shows completely different trends. The growths from 2008 to 2015 are: Canada 0.24 percent, Japan –13.06 percent and U.S. 23.11 percent.

Emi Igawa, Nagoya, Japan


Dear Editor:

Stephen Williamson's QE article takes a jump that warrants a closer look.

He first cites the portfolio balance theory, which relies on banks and broker-dealers replacing bonds sold to the Fed with either new loans or new bonds, thus depressing long-term yields. In other words, the theory presumes that QE offers an addition to, not a replacement for, other financial intermediation.

Therefore, the fact that Canadian real GDP boosted without QE is explained by 1) its reliance on US economy, and 2) large fluctuations in exchange rates.But Williamson's alternative theory depends on QE replacing other intermediation.

To determine which perspective is more realistic, we can use a natural experiment - measuring changes in credit activities from QE1 to QE-pause to QE2 and so forth. And that analysis shows that credit growth alternated almost perfectly between the Fed, on one hand, and banks and broker-dealers, on the other. During QE periods, banks and broker-dealers mostly chose not to increase net lending. (The full results are at http://nevinsresearch.com/blog/qes-untold-story-a-chart-that-fed-correspondents-should-investigate.)

In other words, our natural experiment backs Williamson's argument that we should evaluate QE as a replacement to other intermediation.

Daniel Nevins, Wayne, Penn., principal of Nevins Research and author of Economics for Independent Thinkers.


The third letter comments on the article titled Household Participation in Stock Market Varies Widely by State.

Dear Editor:

I think the methodology in this analysis is very flawed, and a wide variety of conclusions could, therefore, be drawn.

Our household falls within the key household income group discussed. We do all of our savings within tax-deferred retirement vehicles and have substantial savings, with about 75 percent in equities. We never report dividends because we own no equities outside the tax-deferred accounts; so, we are a reason that they report low participation in the stock market.

So an alternative explanation of the data shown in this paper is that the people in the states with high stock market participation rates are investing in tax-inefficient vehicles and could benefit from financial advice to put more or all of their savings into tax-deferred plans. Between Roth and Regular IRAs, 401(k)s, and 403(b)s, there is no reason for anybody making less than $200k per year to have ANY taxable stock dividends.

We may have a retirement crisis, but it is not because people are not buying stocks outside of tax-deferred accounts.

Raymond D’Hollander, Fayetteville, N.Y., an engineer

Commenting Policy: We encourage comments and discussions on our posts, even those that disagree with conclusions, if they are done in a respectful and courteous manner. All comments posted to our blog go through a moderator, so they won't appear immediately after being submitted. We reserve the right to remove or not publish inappropriate comments. This includes, but is not limited to, comments that are:
  • Vulgar, obscene, profane or otherwise disrespectful or discourteous
  • For commercial use, including spam
  • Threatening, harassing or constituting personal attacks
  • Violating copyright or otherwise infringing on third-party rights
  • Off-topic or significantly political
The St. Louis Fed will only respond to comments if we are clarifying a point. Comments are limited to 1,500 characters, so please edit your thinking before posting. While you will retain all of your ownership rights in any comment you submit, posting comments means you grant the St. Louis Fed the royalty-free right, in perpetuity, to use, reproduce, distribute, alter and/or display them, and the St. Louis Fed will be free to use any ideas, concepts, artwork, inventions, developments, suggestions or techniques embodied in your comments for any purpose whatsoever, with or without attribution, and without compensation to you. You will also waive all moral rights you may have in any comment you submit.
comments powered by Disqus

The St. Louis Fed uses Disqus software for the comment functionality on this blog. You can read the Disqus privacy policy. Disqus uses cookies and third party cookies. To learn more about these cookies and how to disable them, please see this article.