The Myth of 2009's Great Consumer Deleveraging

Pundits and analysts have recently celebrated yet another reduction in U.S. consumer debt as a sign that we're in full-on recovery mode and the worst is behind us. Last week the Federal Reserve released data on consumer credit through November 2009. I checked out the data myself and found that all that consumer deleveraging we're hearing about is a big fat myth.

bigcreditgraph.pngThe above chart (Click it! It gets bigger!) shows both the total amount and monthly percent change in both revolving and non-revolving consumer credit from 2000 through 2009, the most recently available datapoint. Let's look at revolving and non-revolving credit:

--Revolving credit peaked in August 2008. It's down 10% in the last year, but up a whopping 42% over the last decade.

--Non-revolving credit (student, boat, and other loans not secured by real estate) peaked in January, 2009, and has only decreased 1% since. Since January 2000, non-revolving debt increased a whopping 72%. On a per-capita basis, from the end of 2001 through 2009, outstanding household revolving credit increased almost 18%, while non-revolving credit outstanding increased almost 42%.

Contrary to the claims of several notable pundits, there was no "Great Consumer Deleveraging" in 2009, nor was there one in 2008. After peaking in mid-2008, mortgage debt decreased only 1.8% through the third quarter of this year. With unemployment sticking around 10 percent and benefits ending for many recipients, I see delinquencies and defaults continuing to rise throughout the year, which I believe is corroborated by historical FDIC data.

We often hear the statistic that "consumer spending makes up 70% of GDP." But we don't often hear the logical follow-up question, "Why is that a good thing?" When growth in consumer spending is funded with debt rather than rising increased incomes, collapse is inevitable.

Presented by

Jordan Terry

Jordan S. Terry is Founder & Managing Director of Stone Street Advisors LLC, which provides independent financial research & analysis services to institutional investors.

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