Deleveraging the American Consumer Sector

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Deleveraging the American Consumer Sector

In the past 10 years, private sector leverage increased at a record pace, thanks largely to cheap mortgage credit.  In fact, since 2000, U.S. consumers have been spending more than they've been earning, and piling up debt. 

According to 2008 Federal Reserve data cited in the Chicago Tribune:

  • Mortgage debt now totals  $10.5 trillion, up from $7.8 trillion in 2004.
  • Revolving consumer debt, primarily from credit cards, totals $957 billion, up from $800 billion in 2004.
  • The average car loan has jumped to $27,397, up from $24,888 in 2004.

Now, with the collapse of the housing market, millions of consumers have begun making an effort to pay down their loans, or at least avoid taking on more debt.  In the first quarter of 2008, household debt grew by just 3.5 percent, compared to 6.1 percent in the previous quarter.  This is the slowest rate of growth since the first quarter of 1993.2 

The growth of home mortgage debt (which includes home equity loans) declined to an annual rate of 3 percent.  That's less than half the pace of 2007, and the smallest increase since the second quarter of 1970.  This makes sense, considering that people have stopped buying homes.  Meanwhile, the growth in consumer credit, including credit cards, remained at 5.75 percent, the same rate as in 2007. 

As consumers try to deleverage themselves, their spending is down, and saving is up.  This is good news for individuals, but it can potentially have a negative impact on the U.S. economy, which depends heavily on consumer spending to drive growth.

A big factor in this change is the relationship of debt to net worth and income.  U.S. household net worth is the total value of household assets, including homes, cash, and equities, less total liabilities, including mortgages, student loans, and credit card debt. 

In the first quarter of 2008, household net worth fell $1.7 trillion, following a $530 billion decline in the fourth quarter of 2007.  Previously, household net worth had been steadily increasing for five years.

An analysis by Lord Abbett senior economist Milton Ezrati revealed that household debt has been growing for over 50 years.3  From the early 1950s to the 1980s, assets dropped from 14 times debt to eight times debt; however, household incomes were rising fast enough to keep the debt-to-income ratio steady. 

After the mid-1980s, debt grew faster than assets and income, so that by the end of the 20

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