Household Debt Shrunk at Fastest Rate on Record in 2009

The Federal Reserve released its quarterly Flow of Funds data (.pdf) through the fourth quarter of 2009 today. The report includes thousands of data points, so it's pretty impossible to summarize the entire thing, but I did note several interesting observations to share. The predominate theme: in 2009 households shrunk their debt and saved more, while government borrowed a lot.

Debt Growth

The report tracks debt growth by sector. Household debt shrunk by 1.7% in 2009. That might not sound like much, but it's the largest decline since the Federal Reserve began keeping track in 1946. In fact, it's the only annual decline in household debt over that period -- even in 2008 household debt increased slightly by 0.1%. Within household debt, mortgage debt declined by 1.6% while consumer credit declined by 4.3%.

Business debt also declined -- by 1.8%. Interestingly, "Corporate" debt increased by 1.4%, which means mostly smaller businesses (partnerships and sole proprietorships, according to the Fed) shrank their debt more than larger corporations.

Yet, for the year overall, debt grew by 3.3%. How could that be? When it came to debt growth in 2009, government picked up the slack. State and local governments' debt grew by 4.8%. Federal government debt grew by a whopping 22.7%. That's easily the second largest increase since at least 1952 -- just shy of 2008's 24.2% growth in federal debt.

Borrowing

Percentages are useful, but what about the actual numbers of dollars in borrowing during 2009? Household borrowing declined by $237 billion, $165 billion of which was thanks to mortgage debt shrinking. Business borrowing declined by $200 billion, even though corporate borrowing increased by $101 billion. That implies that non-corporate borrowing must have declined by $301 billion.

Meanwhile, the government story was quite different. State and local governments borrowed a fresh $109 billion during the year. The federal government borrowed $1.4 trillion. That's more than the $1.2 trillion borrowed in 2008, and nearly seven times the borrowing of 2007. That's also a full trillion-plus more dollars of borrowing than in any year other than 2008.

Personal Savings

Another trend you might have expected is that personal saving ramped up in 2009. Americans saved $472 billion during the year. That's the most we've seen on record -- more than 2007 and 2008 combined.

If we weren't in a deep recession, then I'd say the household trends of decreasing debt and increasing saving were objectively healthy. Yet, some economists wish that consumers would spend more, so to help stimulate the economy and reduce unemployment. And while the government borrowing would be utterly alarming at any other time since the Great Depression ended, most of it was done to cope with the financial crisis and deep recession. But those levels will need to come down dramatically once the unemployment level gets closer to normal. Let's hope Americans' debt and savings habits don't revert back to their pre-2008 behavior then as well, however.